Upgrades and Revised Estimates
BofA Securities analysts have upgraded Capital One Financial and Discover Financial Services from Neutral to Buy, indicating a shift in their perspective. Furthermore, they have revised their price targets, setting them at $129 for Capital One Financial (previously $112) and $116 for Discover Financial Services (previously $94). These adjustments reflect a more positive outlook for the future performance of these companies.
Following the release of the report, Capital One shares experienced a marginal decline of 0.1% and were valued at $115.24 in Wednesday’s trading session. On the other hand, Discover stock witnessed a significant jump of 2.9%, reaching $101.91. This initial market response indicates that investors are intrigued by the analysts’ evaluations and are showing increased confidence in Discover Financial Services.
The Current Credit Cycle
The BofA Securities analysts believe that the credit cycle is currently in its latter stages, predicting that losses will reach their peak in the second half of 2024. Drawing from historical trends, they emphasize that stock prices and company valuations tend to appreciate significantly as delinquencies approach their peak. Encouragingly, they anticipate this positive trend to materialize within the next three to six months.
Factors Influencing the Outlook
The analysts attribute their improved outlook to a combination of favorable macroeconomic conditions and company-specific factors. They cite a better-than-expected macro outlook as a key driver for their positive stance on consumer credit performance in the coming year. It is worth noting that their forecasts already account for higher credit losses in 2024, compared to 2023.
In their comprehensive report, the analysts at BofA Securities have provided compelling reasons to be more optimistic about Capital One Financial and Discover Financial Services. Upgrading these credit card stocks to Buy and revising their estimates and price targets, the analysts project a soft landing for the credit cycle. With a potentially brighter future on the horizon, investors are keeping a close eye on these stocks.
Analysts suggest that recent delinquency trends on Capital One are aligning with typical seasonal patterns, suggesting that the post-Covid deterioration is coming to an end.
BofA believes that Discover has the potential to benefit from the appointment of a permanent CEO and the resumption of share buybacks.
However, BofA is less optimistic about PayPal Holdings. In a separate report, analysts led by Jason Kupferberg downgraded shares to Neutral from Buy and reduced their price target on the payment stock to $66 from $77. They stated that while they don’t believe PayPal is broken, it will take time to fix. Despite this, PayPal stock saw an increase of 3.6%, reaching $59.94.
Though shares have seen a 12% increase since the company reported better-than-expected third-quarter earnings on November 1, BofA remains cautious. The analysts anticipate 2024 to be a transition year for PayPal, as new leadership works towards building its reputation with Wall Street and focuses on boosting transaction profit growth, which struggled under prior management.
In addition to BofA’s cautious stance, BMO Capital Markets analyst Rufus Hone recently assumed coverage of PayPal with a Market Perform rating and a $65 price target.