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Uncovering Wins in Discover's First-Quarter Loss


Company sees improvement in credit card delinquency rates.

Asian stocks rose overnight. The Hang Seng and the Nikkei were up 1.72% and 1.17%, respectively. European stocks were higher in early trading too. And here in the US, we're currently trading higher.

Here's what I'm seeing this morning:

Discover Financial Services (DFS):
The Illinois-based credit card giant was out with its first-quarter numbers after the close last night.

The company posted a loss of $0.22, but was quick to point out: "Results for the first quarter of 2010 included a pre-tax addition to loan loss reserves of $305 million ($185 million after tax), which brings the company's reserve coverage to approximately 12 months of losses." The stock was down a smidge in after-hours action.

My take:

1. There were some positive nuggets to be found within the release. One thing that stood out to me was its credit card delinquency rates. Specifically, it said: "The over 30 days delinquency rate was 5.05%, an improvement of 21 basis points from the prior year and 26 basis points from the prior quarter, reflecting better overall credit trends. Based on these trends, the company believes that the amount of delinquent loan balances may have peaked in the fourth quarter of 2009."

2. Overall I feel more optimistic than I did just a few short months ago about the company's prospects going forward. I have this sense that the $0.68-a-share estimate I'm seeing for this year is doable.

3. However, the stock isn't cheap at about 22.5 times that 2010 estimate. I think there's room to run here -- perhaps to the upper teens. But if I were to belly up, I'd probably want to stop myself out at $14 on the downside.

LSI Corp (LSI):
Anyone else remember back in the day when this stock really rocked?

The California-based microchip company was out with some first-quarter guidance early this morning, and I think the release deserves a look.

It's looking for $0.07 to $0.11 in the period excluding items, which is pretty nice in that the estimate I'm seeing is just $0.07.

Some other thoughts:

1. I sense analysts will give their estimates a little goose on the heels of this news.

There was another interesting tidbit in the release that deserves just as much attention: "LSI also announced today that its board of directors has authorized a stock repurchase program of up to $250 million." Clearly, it would send a good sign if the company bellied up here.

3. But even without all that, I think the shares look like a decent bargain trading at just a smidge over 14 times this year's estimate. If it can hit or beat the $0.41-a-share estimate for this year and do the same for the $0.57 estimate next year, I could see this stock going to the upper single-digits or low double-digits.

Justin Sharon points out in his article this morning that Bank of America/Merrill dressed up its rating on the retailer to Neutral.

My feel on the situation:

1. It's not exactly a huge vote of confidence, but it could draw some attention to the shares in early trading.

2. The stock is pretty richly valued here at more than 27 times this year's estimate, but it could still have some legs. Not only has the company been pummeling expectations, but it's poised to make a new high, which is likely to draw some interest, too.

3. All that said, if I were long, I wouldn't push my luck and would probably use a bump up to start lightening my load.

Broadcom (BRCM):
Auriga slapped a Hold on the California-based chipmaker.

I have to agree with the rating. In my mind, the shares are pretty fairly valued at 16.8 times this year's estimate, which is $1.99.

Yes, the stock is trading near its highs and there's a chance the momentum folks could cause the shares to have a little more upside from here. But I'm wondering what other catalyst might exist (if any) in the near term that could help take this stock to the next level. I'm not seeing one at this point, so I'll be on the sidelines. There are better opportunities out there at this point. (Sorry, Broadcom bulls.)

Have a great day!
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