March 10, 2009 / 2:33 PM / 10 years ago

UPDATE 1-Stifel ups Capital One, Discover Financial to buy

March 10 (Reuters) - Stifel Nicolaus upgraded U.S. credit card firms Capital One Financial Corp (COF.N) and Discover Financial Services (DFS.N) to “buy,” saying the two companies may be able to overcome capital and liquidity concerns.

Shares of Capital One and Discover Financial were up 11 percent each at $9.73 and $5.78, respectively, in early morning trade on the New York Stock Exchange.

Capital One, one of the largest U.S. issuers of MasterCard and Visa credit cards, has a $45 billion liquidity portfolio and it could tap additional Treasury capital at close to $17 per share, analyst Chris Brendler said in a note to clients.

“Although capital remains a key concern, we believe it is offset by Capital One’s access to government funding as well as today’s extreme valuation,” he said.

The analyst said he was also attracted to the company’s credit trends, which have recently been the strongest in the sector.

Brendler said he sees Discover Financial’s stock as oversold, adding that he believes the company can manage through even if industry losses rise well above his current forecast.

The company, which is the No. 4 U.S. credit card network, still has sufficient capital and will see significant gains from lawsuit settlements with Visa and MasterCard, he said.

Visa (V.N) and MasterCard (MA.N) agreed in October to pay Discover a total of $2.75 billion to settle a lawsuit over anti-competitive practices.

“In addition to capital, we also like Discover’s loan portfolio with mostly cards, almost no subprime, and no mortgage exposure,” the analyst noted.

However, Brendler cut 2009 earnings forecasts for both companies, projecting operating losses for them in 2009 and 2010, along with significant downside economic risk. [ID:nWNAB2247]

As recession deepens and unemployment reaches its highest level in 15 years, the credit card industry’s outlook is gloomy.

Banking analyst Meredith Whitney wrote in the Wall Street Journal earlier today, that “credit cards are the next credit crunch,” as contracting credit lines lower consumer spending and hurt the economy.

Stifel Nicolaus previously had “hold” ratings on both the stocks. It has price targets of $12 on Capital One and $7 on Discover Financial. (Reporting by Adheesha Sarkar in Bangalore; Editing by Anil D’Silva)

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