On Thursday, Discover Financial Services (NYSE:DFS) received an upgrade in its stock rating by Morgan Stanley, moving from Equalweight to Overweight. The financial services firm also saw its price target increased significantly to $133.00, up from the previous target of $105.00.
Morgan Stanley's decision comes with a positive outlook on Discover Financial's future, highlighting the company's potential in the consumer credit sector. According to the firm, as consumer delinquency rates begin to slow, stocks with a focus on consumer credit, like Discover Financial, are becoming more attractive. This is especially true for companies that have shown recent underperformance in credit compared to their peers.
The analysis points out that Discover Financial's credit performance has been weaker than its competitors over the last few quarters. The card delinquency (DQ) and net charge-off (NCO) rates for Discover are notably higher than the industry average. However, Morgan Stanley believes that the trend in delinquencies for Discover is improving and should continue to do so, following a pattern that Capital One Financial Corp (NYSE:COF). has been experiencing for several months.
Morgan Stanley anticipates a slowdown in card delinquency rates for Discover Financial, projecting a decrease from a year-over-year increase of 134 basis points in 2023 to just 13 basis points in 2024. This expected improvement is one of the key reasons for the firm's optimistic stance on Discover Financial's stock.
In addition to the expected improvements in credit performance, Morgan Stanley also mentioned strategic corporate developments that could serve as catalysts for Discover Financial's stock. The company has recently appointed a new CEO, and there is anticipation surrounding the potential sale of a $10 billion student loan portfolio by the first half of 2024. The successful execution of this sale could pave the way for a resumption of share repurchases following the stress test results in June.
InvestingPro Insights
In light of Morgan Stanley's recent upgrade of Discover Financial Services (NYSE:DFS), InvestingPro data and tips offer further insights that could inform investors about the company's financial health and market performance. Discover Financial's market capitalization stands at a robust $26.71 billion, reflecting investor confidence and the company's scale in the financial sector.
InvestingPro data indicates that Discover Financial Services boasts a price-to-earnings (P/E) ratio of 9.44 as of the last twelve months ending Q4 2023, suggesting that the stock may be undervalued compared to industry averages. This aligns with the stock's price/book value of 1.82, which could indicate that the company's assets are being priced reasonably in the market.
One of the InvestingPro Tips highlights that management has been aggressively buying back shares, a move that often reflects leadership's belief in the company's undervalued stock and future growth potential. Additionally, Discover Financial has a track record of raising its dividend for 13 consecutive years, a testament to its commitment to returning value to shareholders.
Investors should note that while some analysts have revised their earnings expectations downwards for the upcoming period, the company has a strong return over the last three months, with a 27.04% price total return. This could signal a recovering trend in line with Morgan Stanley's positive outlook.
For those looking to dive deeper into Discover Financial Services' performance and future prospects, InvestingPro offers additional insights. By using the coupon code SFY24 for an additional 10% off a 2-year InvestingPro+ subscription or SFY241 for an additional 10% off a 1-year InvestingPro+ subscription, investors can access an array of valuable tips. There are currently 6 more InvestingPro Tips listed for Discover Financial Services at https://www.investing.com/pro/DFS, which could further guide investment decisions.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.