The Best Banks To Buy: Why This Analyst Likes Capital One, Discover And Synchrony Financial

Corporate tax cuts and rising interest rates have been a winning recipe for financial stocks in the second half of 2017. However, even with the Financial Select Sector SPDR Fund (NYSE: XLF) up 15.6 percent in the past six months, one analyst says the good news out of Washington is not yet priced into three top credit card stocks.

The Analyst

Bank of America analyst Kenneth Bruce has issued the following three upgrades:

• Capital One Financial Corp. (NYSE: COF) from Neutral to Buy, price target from $99 to $107.
• Discover Financial Services (NYSE: DFS) from Neutral to Buy, price target from $75 to $83.
• Synchrony Financial (NYSE: SYF) from Neutral to Buy, price target from $42 to $52.

Bruce also reiterated a Buy rating for American Express Company (NYSE: AXP) and raised his price target from $113 to $128.

The Thesis

According to Bruce, the tailwinds from tax cuts will likely outweigh credit concerns in the minds of investors.

“The 21% corporate tax rate contemplated by Congress could add 15-25% to EPS (assuming benefits from a lower tax rate are fully realized), based on our assessment of the run-rate benefits,” he said.

Bruce said Discover and Synchrony will likely be on the high end of that EPS growth range, while Capital One and American Express will likely get around a 17 percent boost.

Regardless of the potential EPS impact, Bruce said investors should expect earnings multiples to expand across the board, driving credit card stocks higher.

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Price Action

Here’s how the impacted stocks were trading on Monday morning:

• American Express was up 1.8 percent.
• Synchrony Financial was up 3.7 percent.
• Discover was up 2.2 percent.
• Capital One was up 3.4 percent.

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