Capital One Financial’s acquisition of Discover Financial Services could spell upside for the bank in the coming months, according to UBS. Analyst Erika Najarian upgraded shares of Capital One to buy from neutral and increased her price target by $67 to $235, which implies 34% upside. Najarian also raised her rating on Discover to buy from neutral and upped her price target of that name by $89 to $239, reflecting almost 41% upside potential. The moves come months after Capital One announced its plans to acquire Discover in a $35.3 billion all-stock deal back in February 2024. The deal is expected to close in early 2025 . “In the case of COF/DFS, we see a rare opportunity for investors to own a vertically integrated payments platform and card juggernaut, leveraging DFS’s credit and debit networks to generate revenues without taking balance sheet or credit risk, and to lower the company’s natural cost of funding — driving synergies well beyond what is typical in bank mergers,” the analyst wrote in a note to clients on Monday. “We think this deal is actually rather pro-competitive, allowing COF to compete more effectively with the credit card network Goliaths (V, MA) and the deposit gathering Goliaths (JPM, BAC, WFC),” Najarian continued. Najarian thinks the deal will lead to greater earnings power for Capital One. She anticipates annual earnings per share in the medium term could range between the mid-$20 and $30, above the company’s expected 2024 earnings per share of nearly $14. In addition, the analyst estimates that Capital One’s adjusted operating efficiency could reach around 35% by 2027. That would represent an increase of about 10 percentage points, she noted. Najarian’s bullish call on Capital One is among the minority on Wall Street. According to LSEG, 10 of the 23 analysts covering it have a strong buy or buy rating, while 11 have a hold rating and two have an underperform rating. Shares rose in premarket trading Monday following the calls, with Capital One gaining about 0.2% and Discover rising nearly 1%. Both stocks also outperformed the broader market in 2024. Capital One popped 36% and Discover moved even higher, jumping more than 54%.
