Navigating Discover's Merger With Capital One: Analyst Highlights Opportunities And Challenges Ahead

RBC Capital Markets analyst Jon G. Arfstrom downgraded Discover Financial Services DFS to Sector Perform from Outperform at an increased price target of $140.00 (from $117).

The move came after the company inked a merger deal to be acquired by Capital One Financial Corp COF.

Per the terms, Discover shareholders will receive 1.0192 shares of Capital One for every share they hold, translating to a 26.6% premium over Discover’s last closing price of $110.49 on February 16, 2024.

The deal is expected to be over 15% accretive to adjusted non-GAAP EPS and generate pre-tax synergies of $2.7 billion in 2027.

The analyst says the announced merger is compelling, with many potential strategic and financial benefits for the combined franchise.

The analyst applauded the company’s efforts to work through the challenges from last year’s headwinds surrounding the compliance and risk management issues, senior leadership transition, and share buyback suspension.

Arfstrom notes the company has been making progress in meeting these challenges and is on the path to regaining momentum as it progresses through 2024, particularly as it gets closer to a peak in card losses this year. 

The analyst expects a reduction in emphasis on the private student lending business due to its exit by the company and potential for sale.

Arfstrom maintained EPS estimates of $11.45 and $14.20 in 2024 and 2025, respectively. 

Price Action: DFS shares are trading higher by 0.60% at $121.44 on the last check Thursday.