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Discover Financial (DFS) to be Acquired by Capital One for $35B
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Discover Financial Services (DFS - Free Report) recently announced that it will be acquired by Capital One Financial Corporation (COF - Free Report) in an all-stock deal for $35.3 billion. Under this transaction, Capital One will provide 1.0192 shares of its company for each DFS share. This represents a premium of 26.6% on DFS’s closing price of $110.49 on Feb 16, 2024. The deal is expected to close by late 2024 or early 2025, subject to regulatory and shareholder approvals and closing conditions. After closing, Discover Financial shareholders will own 40% of the combined company.
This move bodes well for Discover Financial, which is struggling to generate positive results. Its adjusted earnings plummeted 59% year over year in the fourth quarter of 2023. The combined entity will leverage complementary franchises and capabilities. DFS has left no stone unturned to increase its acceptance rates, although it has never been able to surpass Mastercard and Visa. This combination will improve DFS’s acceptance and business as COF will eliminate Mastercard and Visa to have DFS as its payments network partner. However, it is yet to be seen if COF can properly leverage DFS’s widespread payments network.
Discover Financial’s fourth-quarter results were hurt by higher operating costs. DFS combining with COF will provide cost synergies as fixed costs of technology tend to improve when the company gets bigger. Their complementary credit card businesses will be able to provide enhanced products by leveraging each other’s expertise. This combination is expected to generate expense synergies worth $1.5 billion in 2027, partially offset by investments made in Discover Network. This transaction will also prove to be beneficial for shareholders as they will be able to participate in the success of the combined company.
Discover Financial’s national direct savings bank will complement Capital One Bank, enhancing the competitiveness of the combined entity in the banking space. Network synergies are expected to be around $1.2 billion in 2027. Return on invested capital is expected to come in at 16% in 2027.
Price Performance
Discover Financial’s shares have gained 28.6% in the past three months compared with the 28% rise of the industry.
Image Source: Zacks Investment Research
Zacks Rank & Key Picks
Discover Financial currently has a Zacks Rank #3 (Hold).
The Zacks Consensus Estimate for EZCORP’s fiscal 2024 earnings indicates a year-over-year increase of 14.1%. EZPW delivered a four-quarter average earnings surprise of 27.7%. The consensus estimate for fiscal 2024 and 2025 earnings has moved up 12.9% and 7.8%, respectively, in the past 30 days.
World Acceptance Corporation delivered a four-quarter average earnings surprise of 59.8%. The Zacks Consensus Estimate for WRLD’s fiscal 2023 and 2024 earnings indicates year-over-year increases of 253.1% and 15.6%, respectively. The consensus estimate for fiscal 2024 and 2025 earnings has moved up 17.9% and 11.8%, respectively, in the past 30 days.
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Discover Financial (DFS) to be Acquired by Capital One for $35B
Discover Financial Services (DFS - Free Report) recently announced that it will be acquired by Capital One Financial Corporation (COF - Free Report) in an all-stock deal for $35.3 billion. Under this transaction, Capital One will provide 1.0192 shares of its company for each DFS share. This represents a premium of 26.6% on DFS’s closing price of $110.49 on Feb 16, 2024. The deal is expected to close by late 2024 or early 2025, subject to regulatory and shareholder approvals and closing conditions. After closing, Discover Financial shareholders will own 40% of the combined company.
This move bodes well for Discover Financial, which is struggling to generate positive results. Its adjusted earnings plummeted 59% year over year in the fourth quarter of 2023. The combined entity will leverage complementary franchises and capabilities. DFS has left no stone unturned to increase its acceptance rates, although it has never been able to surpass Mastercard and Visa. This combination will improve DFS’s acceptance and business as COF will eliminate Mastercard and Visa to have DFS as its payments network partner. However, it is yet to be seen if COF can properly leverage DFS’s widespread payments network.
Discover Financial’s fourth-quarter results were hurt by higher operating costs. DFS combining with COF will provide cost synergies as fixed costs of technology tend to improve when the company gets bigger. Their complementary credit card businesses will be able to provide enhanced products by leveraging each other’s expertise. This combination is expected to generate expense synergies worth $1.5 billion in 2027, partially offset by investments made in Discover Network. This transaction will also prove to be beneficial for shareholders as they will be able to participate in the success of the combined company.
Discover Financial’s national direct savings bank will complement Capital One Bank, enhancing the competitiveness of the combined entity in the banking space. Network synergies are expected to be around $1.2 billion in 2027. Return on invested capital is expected to come in at 16% in 2027.
Price Performance
Discover Financial’s shares have gained 28.6% in the past three months compared with the 28% rise of the industry.
Image Source: Zacks Investment Research
Zacks Rank & Key Picks
Discover Financial currently has a Zacks Rank #3 (Hold).
Some better-ranked stocks from the Financial – Consumer Loans space are EZCORP, Inc. (EZPW - Free Report) and World Acceptance Corporation (WRLD - Free Report) . Each company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for EZCORP’s fiscal 2024 earnings indicates a year-over-year increase of 14.1%. EZPW delivered a four-quarter average earnings surprise of 27.7%. The consensus estimate for fiscal 2024 and 2025 earnings has moved up 12.9% and 7.8%, respectively, in the past 30 days.
World Acceptance Corporation delivered a four-quarter average earnings surprise of 59.8%. The Zacks Consensus Estimate for WRLD’s fiscal 2023 and 2024 earnings indicates year-over-year increases of 253.1% and 15.6%, respectively. The consensus estimate for fiscal 2024 and 2025 earnings has moved up 17.9% and 11.8%, respectively, in the past 30 days.