William Blair Maintains Bullish Stance On Discover Ahead Of 2Q14 Results

In a research note released yesterday, William Blair analyst Robert Napoli reiterated an Outperform rating on Discover Financial Services (DFS), ahead of the upcoming 2Q14 earnings results. Discover is scheduled to report the results after the markets close on Tuesday, July 22, with an earnings call scheduled for 5:00 p.m.Eastern. No price target was assigned.

Dapoli noted, “We maintain our EPS estimates of $1.25 for second quarter 2014, $5.04 for full year 2014, and $5.35 for 2015. The consensus estimates are $1.31 for second quarter 2014, $5.28 for 2014, and $5.59 for 2015. We believe the primary difference in our estimates versus consensus is our forecast for a faster normalization of credit losses and reserve builds; however, we could be conservative considering the credit quality trends at this point”.

The analyst added, “We believe Discover is a leading direct bank with a great brand and generates high returns on capital. Over time, we believe the investment community will appropriately recognize the value of the Discover franchise and story. Discover shares are valued at 11.8 times our 2015 EPS estimate, compared with about 14 times for a broad group of generally slower-growing, lower-return regional banks. In our view, Discover generates higher return on equity and has a higher long-term earnings growth rate than the regional banks. It has substantial excess capital, which it is using to repurchase shares. Discover is more credit sensitive and regional banks benefit more from rising interest rates, but over the long term we believe Discover’s valuation gap with that group will narrow materially. We believe at least a 13-times multiple on 2015 EPS is reasonable”.

According to TipRanks.com, which measures analysts and bloggers success rate based on how their calls perform, analyst Robert Napoli currently has a one-year average return of 28.7% and an 63% success rate. Napoli has a 44.6% average return when recommending DFS, and is ranked #729 out of 3217 analysts.

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