Discover Financial Services (NYSE:DFS): Solid call from MSCO

They are upgrading DFS to Overweight from Underweight as they think it will beat consensus estimates in 2008, thanks to more prudent underwriting (lower credit losses), more leverage in the net interest margin to Fed rate cuts, and limited vulnerability to gapping spreads in the unsecured funding markets. It now looks like more aggressive peers, such as AXP and COF, may have taken on more credit and funding risk than they should have, and the firm expects those companies to disappoint consensus estimates. They regard COF as exposed to subprime card and auto loans. AXP may be in for further problems as prime mortgage troubles spread through its card portfolio, and it is also heavily reliant on unsecured debt, where spreads are now widening. Longer term, they see value in the DFS spin-off story, which has yet to play through to its conclusion.

Firm's new tgt on DFS is $24 (up from $15).