Buckingham Research Initiates Coverage on Discover Financial (DFS) with a Neutral

July 17, 2008 10:22 AM EDT

Buckingham Research initiates coverage on Discover Financial (NYSE: DFS) with a Neutral.

Buckingham analyst says, "Discover, the fifth largest credit card issuer (ranked by managed loans) and payments network operator, was spun off from Morgan Stanley in mid-2007. Discover faces the same challenges other credit card companies face: weaker credit trends, challenging funding environment, and slower spending growth. Discover’s losses and loss rate haven’t risen as quickly as some other issuers’ lately, but even for Discover, losses are expected to rise over the balance of the year. Slow asset growth has helped the company accumulate capital and reduce its leverage (tangible equity now 11.8% of managed assets) which should help the company weather the current downturn, but ROE will remain below normal. While we believe DFS shares are trading well below the company’s intrinsic value, we can’t predict when conditions will improve. Concern about the effects of the current economic environment on credit and earnings seem likely to continue to weigh on DFS shares and the shares of other financial near term."

Discover Financial Services (DFS) is a credit card issuer and electronic payment services company.

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• Morgan Stanley
• Buckingham Research

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