Analysts warn of credit pressures at Discover

On Thursday, Discover said its profit was boosted by its third-party payments business--which processes ATM and debit transactions and other banks' cards--and the sale of its British card business.

Keefe, Bruyette & Woods analyst Sanjay Sakhrani subsequently raised his fiscal 2008 estimate to $1.55 per share from $1.46 per share, but lowered his fiscal 2009 estimate by 10 cents to $1.39 per share to reflect lower managed loan growth and credit-card sales volumes. Sakhrani also trimmed his target price on the stock by $1 to $17.

"We still think Discover's credit quality should fare relatively better than the industry, but it is not immune from the implications of a weaker economy," Sakhrani wrote in a note to clients Friday. Sakhrani maintained a "Market Perform" rating on the stock.

Stifel, Nicolaus & Co. analyst Chris Brendler is also concerned by the company's long-term outlook.

"Credit quality appears likely to continue to deteriorate as delinquencies dropped less than we expected," Brendler said. "Given our bearish stance on the consumer, we expect losses to rise significantly as the year progresses and further in 2009."

Brendler also believes management is overly optimistic in reducing its loan loss reserves this quarter, and may need to bring more loans back on its balance sheet as the securitization markets remain stressed.

A Discover representative was not immediately available for comment.

Brendler lowered his full-year profit estimate by 10 cents to $1.50 per share and his 2009 estimate by 20 cents to $1.25 per share.

Analysts polled by Thomson Financial, on average, estimate earnings of $1.50 per share in 2008 and $1.48 per share in 2009.