Choose Discover over Capital One, says Sandler O'Neill

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%.

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Comments (1)
  • benbolp
    , contributor
    Comments (57) | Send Message
    Discover has a huge advantage over competitors in the banking business. Without long term leases and real estate operating costs (also labor) involved with the retail bank branch model will hold competitors (like Cap 1) back from mid-long term growth. Oh, and if you bank Discover you get access to thousands of ATM's at no charge all over the united states.


    With the ability to deposit a check from my mobile phone, I have not been to a bank branch in over a year.


    Discover is also investing in higher growth and innovative banking/consumer loans which should help EPS by Q2/Q3 2014.
    10 Sep 2013, 05:38 PM Reply Like
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