Discover Financial shares slip on 3Q results

Shares of Discover Financial slide after rise in loan-loss reserve weighs down 3Q earnings

Associated Press

LOS ANGELES (AP) -- Shares of Discover Financial Services fell Tuesday, a day after the lender and credit card issuer reported an 8 percent decline in third-quarter profit.

THE SPARK: Discover, best known for its namesake credit card, reported late Monday that its profit after paying preferred dividends fell to $579 million, or $1.20 per share, in the three months ended Sept. 30. Results were hurt by a provision for potential loan losses of $333 million, up from $136 million a year earlier.

Discover amped up its reserves in anticipation of lower recoveries on older accounts that have been written off as unpaid, as well as growth in loans. The prior-year quarter also included a big release of reserves for loan losses.

THE BIG PICTURE: Discover, the nation's sixth-largest credit card issuer, has been working to grow its credit card business, while also pushing further into direct banking, offering auto, personal and student loans. It began offering home equity loans in August.

THE ANALYSIS: In a research note, Sterne Agee analysts Greg Smith and Jennifer Dugan said that they expect two key trends — strong credit and solid loan growth — will support shares in the coming months. The analysts don't see the quarter's spike in loan-loss reserves as a big issue.

They raised their earnings per share forecasts for Discover. They now expect the company will deliver earnings per share in 2013 of $4.81, up from $4.70. They also raised their estimate for 2014 to $4.85 per share, up from $4.80.

The analysts, who have a "Buy" rating on the stock, also raised their price target on Discover shares to $58 from $54.

THE SHARES: Down $1.68, or 3.1 percent, to $52.06 in afternoon trading. Discover shares are up 35 percent this year.

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