Discover Financial Services (NYSE:DFS) shares are trading higher today after the company reported better-than-expected second-quarter EPS results yesterday.
The company reported GAAP earnings of $6.06 per share, beating the estimate of $3.07 per share, and quarterly Net Interest Income (NII) of $3.524 billion.
RBC Capital Markets analyst Jon G. Arfstrom says the stock's performance (Sector Perform, with a $140 price target) is likely to be influenced primarily by the pending merger with Capital One Financial Corporation (NYSE:COF), with the expectation that the acquisition will eventually be completed.
Concurrently, Discover is progressing independently by addressing regulatory and compliance issues, simplifying operations focused on core consumer banking and everyday card products, divesting student lending, and achieving peak credit costs, writes the analyst.
Arfstrom anticipates these strategic actions to position the company well as it moves forward in the year.
The company now projects an FY24 margin of 11.1% to 11.4%, up from 10.7% to 11.0% previously, with the student loan sale expected to boost the NIM by around 10 basis points.
The analyst anticipates management will narrow the guidance range further as 2024 progresses. Additionally, the buyback remains on hold due to the pending merger.
Seperately, the company disclosed a deal to sell its $10.1 billion private student loan portfolio to investment vehicles managed by The Carlyle Group Inc. (NASDAQ:CG) and KKR & Co. Inc. (NYSE:KKR), with servicing to be handled by Firstmark Services, a division of Nelnet, Inc.(NYSE:NNI).
The portfolio is set to be sold for approximately $10.8 billion, reflecting a premium of around $700 million or about 7%, says the analyst.
Arfstrom writes that the robust premium on the portfolio reflects its high quality and attractiveness, aligning with management's expectations upon announcing the business exit several quarters ago.
Investors can gain exposure to the stock via BlackRock ETF Trust BlackRock Future Financial And Technology ETF (NYSE:BPAY) and Amplify ETF Trust Amplify Mobile Payments ETF (NYSE:IPAY).
Price Action: DFS shares are up 0.28% at $141.81 at the last check Thursday.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.