Discover Financial Services (DFS), Morgan Stanley (MS): Giving Credit Where Credit’s Due

A favorite holding of billionaire investors Warren Buffett, American Express attributes include its brand name and the fact that most “members” pay off monthly balances on time. Average spending on American Express Company (NYSE:AXP) cards is more than that of its rivals, like Discover. Nomura Securities just reiterated its “Buy” rating on American Express with a lofty $73 price target. That followed strong Q1 earnings of $1.15 a share, up 7% from a year ago.

Indeed, American Express Company (NYSE:AXP) looks impressive, but from a value-investing approach, Discover presently is a better buy.

Trading near its 52-week high, Discover’s valuation, which Barron’s explains doesn’t fully reflect growth opportunities, could spurt ahead by 25% in a year’s time.

Passing the Fed’s annual stress test, Discover was given the go ahead to continue its share repurchasing program and boost its divided. While Discover decided to keep its dividend at $0.14 per share with a yield of 1.4%, an increase could be on the way.

Discover is enjoying the tailwinds of improved credit quality and loan growth. In addition, while many credit card companies are dealing with customer defections, Discover is steadily adding new customers. And, as a spate of economic data points to an improving economy, robust consumer spending, and a healing housing market combined with historic stock market records, shareholders could discover significant upside from Discover Financial Services (NYSE:DFS).

The article Giving Credit Where Credit’s Due originally appeared on Fool.com and is written by Diane Alter.

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