February 22, 2008 / 2:21 PM / 11 years ago

UPDATE 2-Morgan Stanley ups Discover Financial; shares jump

(Updates share price details)

Feb 22 (Reuters) - Morgan Stanley upgraded Discover Financial Services (DFS.N) and said the credit-card firm would outperform rivals Capital One Financial (COF.N) and American Express (AXP.N) on benefits from moderate credit losses, leverage to lower interest rates, and strong liquidity.

Shares of Discover jumped as much as 9 percent while Amex and Capital One fell about 1 percent in early morning trade on Friday.

The investment bank raised its rating on the fourth-largest credit card network to “overweight” from “underweight” and expects the company to post 2008 results above consensus estimates.

Analyst Kenneth Posner said Capital One and Amex have taken on more credit and funding risk than they should have, adding that he expects these companies to miss 2008 consensus estimates. He rates both companies “underweight.”

Posner expects shares of these companies to remain under pressure until investors can anticipate a turn in the credit cycle.

“We continue to think that Capital One’s exposure to subprime cards and auto loans is a major risk factor,” Posner said.

He believes Amex grew its credit card portfolio too quickly and will continue to suffer from disappointing loss rates.

“The housing market may pose further risk for Amex,” Posner said in a note to clients.

UBS earlier this month downgraded Discover, Capital One and Amex based on its expectation of a consumer-led recession in the first half of 2008, triggering a fall in their share price and dragging the Dow Jones industrial average .DJI down.

Posner said he was also assuming a mild recession in the first half of 2008, followed by a recovery and a peak in credit losses in first quarter of 2009.

He cut his price target on American Express’ stock to $42 from $44, while raising his target on Capital One to $40 from $34.

The price target on Discover was raised to $24 from $15.

A more severe or protracted recession would be a risk to the Discover price target, he said.

Shares of Discover rose to a high of $15.40 and were trading up about 5 percent at $14.74 Friday on the New York Stock Exchange, while Amex and Capital One shares were trading down about 1 percent at $44.32 and $47.32 respectively. (Reporting by Nivedita Gupta in Bangalore; Editing by Pratish Narayanan)

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