'Earnings Upside' for Discover: Guggenheim

Although Discover "has noted aspirations for ~$30 billion in originations, we do not believe home lending will be significantly accretive to earnings for several quarters," Darst said.

Discover's shares closed at $32.37 Thursday, returning 35% year-to-date, following a 31% return during 2011.

The shares trade for 1.9 times tangible book value, according to Worldscope data provided by Thomson Reuters, and for eight times the consensus 2013 EPS estimate of $3.89, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.07.

Despite the strong return for the shares, Darst said that Discover's stock "is at the lower end of its three-year trading range (5-13x forward P/E)."

Discover in March announced a $2 billion share repurchase program, which Darst expects "will be executed over the next six quarters with an average of $335 million per quarter," and will be followed by additional repurchases. "Assuming DFS repurchases 6-8% of outstanding shares in 2014 with provision expense of 3.5-4.0%, we estimate earnings should approximate $3.70 to $4.25," he said.

Darst's $40 price target for Discovers shares "represents 10x our FY13E EPS," along with "a 1x multiple premium relative to the current valuation of the large cap banks." While "the current profitability level suggests a higher valuation," the analyst said that "EPS growth in 2012 and 2013 will be more challenging, as reserve release is near an end."