Shares of Discover Financial Services slid Thursday after an analyst lowered his earnings estimate for the Riverwoods, Ill., credit card company and reiterated a "sell" rating.
Michael Taiano, an analyst with Sandler O'Neill & Partners LP in New York, wrote in a research note that the Federal Reserve Board is expected to raise interest rates this summer, which is likely to cut into the card company's profit margins.
"In addition to protracted credit deterioration into 2009, we believe 2009 earnings will be negatively affected by Fed tightening, which should limit margin expansion," Mr. Taiano wrote.
He pointed out that Discover's margins have improved in the past after Fed rate cuts "helped offset rising credit losses. However, with the odds increasing of the Fed tightening as early as its August meeting, we believe that unlike in the previous credit cycle, Fed rate increases will precede an improvement in credit losses, creating added pressure on Discover's earnings next year."
Mr. Taiano also said that consumers are facing higher debt loads and lower purchasing power, largely because of inflation and the poor economy. "As a result, we believe it will be more difficult for card issuers to pass on higher funding costs to borrowers without jeopardizing credit performance," he wrote.
He trimmed his 2009 earnings projection to $1.43, from $1.70, and cut his 12-month price target for the stock to $14 from $15.
Discover shares closed Thursday at $14.82, down 2.82% from Wednesday's close.
