Discover shares rise; analyst raises price target

NEW YORK - An analyst on Monday increased his price target for Discover Financial Services, but remained cautious about the credit card lender as it likely faces rising loan losses.

Shares of Discover rose in afternoon trading despite the mixed opinion from Jason Arnold of RBC Capital Markets Corp. and as the broader market declined. Discover shares rose 26 cents, or 2.8 percent, to $9.58. Shares have traded from $4.73 to $18.15 during the past year.

Arnold wrote in the note that he increased his price target for Discover based on an updated year-end estimated book value of $13.05 per share. Arnold increased his price target to $10 from $8.

Discover also benefited from better-than-expected fiscal second-quarter results, Arnold wrote in the note. Arnold said the results were boosted by a smaller-than-anticipated provision for loan losses. Loan losses, though, will continue to mount and Discover will have to increase its provisions to cover missed payments by customers, which could affect future profitability, he added.

Discover said Thursday its earnings available to common shareholders slipped to $209.2 million, or 43 cents per share, during the quarter ended May 31, down from $234.1 million, or 48 cents per share, a year earlier. The results were boosted by $295 million from a gain connected to the settlement of a lawsuit with Visa Inc. and MasterCard Inc.

Arnold increased his fiscal 2009 operating loss estimate for the year ending Nov. 30 to $1.57 per share from $1.12 per share to exclude the impact of revenue from the Visa and MasterCard settlement.

Analysts surveyed by Thomson Reuters, on average, forecast a loss of 96 cents per share for fiscal 2009. Analysts' estimates typically do not include special items such as the gains from the lawsuit settlement.

Arnold now predicts Discover will lose 73 cents per share in fiscal 2010, compared with a previous estimate for a loss of 50 cents per share because of an expected shift of loan-loss provisions to 2010 from 2009. Analysts expect a loss of 2 cents per share for fiscal 2010.

Because of the smaller-than-expected provisioning in the second quarter, Discover will have to push higher provisions into 2010, Arnold said. Charge-offs, loans written off as not being repaid, are also likely to creep high through the first half of 2010 as the unemployment rate continues to rise and bankruptcy cases increase.

Credit card loan losses often move closely with the unemployment rate. Nearly all credit card lenders have faced rising losses as more consumers lose jobs amid the ongoing recession.

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