Discover Financial Should Move on MSCO Note

It's fairly quiet out there this AM. Think the biggest call seems to be Morgan Stanley's upgrade on Discover Financial Services (NYSE:DFS):

They are upgrading DFS to Overweight from Underweight as they think it will beat consensus estimates in 2008, thanks to more prudent underwriting (lower credit losses), more leverage in the net interest margin to Fed rate cuts, and limited vulnerability to gapping spreads in the unsecured funding markets. It now looks like more aggressive peers, such as AXP and COF, may have taken on more credit and funding risk than they should have, and the firm expects those companies to disappoint consensus estimates.

They regard COF as exposed to subprime card and auto loans. AXP may be in for further problems as prime mortgage troubles spread through its card portfolio, and it is also heavily reliant on unsecured debt, where spreads are now widening. Longer term, they see value in the DFS spin-off story, which has yet to play through to its conclusion.

Firm's new target on DFS is $24 (up from $15).

Notablecalls: Looks like a really solid call from MSCO. I expect the stock to trade above $15 today.

Comments

[dkhkch:]

Just barely, heading for a $14.40 close until financials and the market took off at 3:30pm

2008 Feb 23 10:40 AM

[eegorr:]

Morgan Stanley used to own Discover... do they still hold stock?

If so, it could be a big reason behind the upgrade, and why it was discounted by the market.

2008 Feb 23 12:23 PM