Discover (DFS +1.9%) and Capital One (COF +2.5%) are similarly valued at 10x 2014 estimated EPS, but Sandler O'Neill prefers Discover, saying the stock deserves a premium due to superior credit quality and loan growth. Discover grew credit card loans 4.9% Y/Y in Q2, while CapOne was negative. Discover's 30-plus day delinquency rate of 1.58% was below that of all U.S. banks at 2.52%. Finally, Discover's net charge-offs of 2.34% compares to 3.51% for the industry.
Discover also trades at an undeserved discount to regional banks (KRE). Acknowledging the differences in Discover's and the regional banks' business models, Sandler still believes the discount is excessive again given superior loan growth and improved credit quality. Finally, Discover's net interest margin has consistently exceeded 9%.