Analysts at Citi have raised their rating on Discover Financial Services to Buy from Neutral, citing several catalysts that they believe will boost the company’s shares in the coming year. They have also increased their forecasts for earnings and raised their stock price target to $133 from $93.
The analysts highlight a number of factors that are expected to drive growth for Discover Financial Services. These include the reinstatement of regular share repurchases, the sale of its student loan portfolio, a likely peaking of credit losses in 2024, and a reduction in expense pressures as the company simplifies its business.
Citi expects the company to reinstate its regular buyback program in the middle of next year. Exiting the student loan business is seen as creating potential for earnings accretion and is likely to be accompanied by a large buyback program unrelated to its regular repurchases. Discover Financial Services recently announced that it will stop accepting applications for student loans, considering strategic alternatives such as selling its Discover Student Loans portfolio.
In addition to these developments, the company is also focused on curbing compliance-related costs and making improvements in consumer servicing compliance, risk management, and corporate governance. While these costs may remain elevated in the short term, analysts believe that leaving the student loan business will alleviate some of the expense pressures.
Furthermore, Discover Financial Services will soon have a new leader, as Michael Rhodes has been appointed as the new chief executive officer and president. He is set to assume his role on or before March 6, replacing interim CEO John Owen.
Despite a rally in shares over the past month, analysts believe there is still potential for further growth as credit and regulatory concerns fade. Currently trading at $110.37, shares are 13% below their 52-week high.
