Discover Deserves No Credit - Barron's

| About: Discover Financial (DFS)

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All Charged Up by Jack Willoughby

Summary: Shares of Morgan Stanley (NYSE:MS) spinoff Discover (NYSE:DFS) will trade at about $30 on a when-issued basis. CEO David Nelms has been touting the credit-card company to investors, telling them that as an independent concern it will be able to boost merchant acceptance and increase transaction volume. But Calyon analyst Craig Maurer is concerned the card may have a hard time breaking the dominance of rivals MasterCard (NYSE:MA), Visa and American Express (NYSE:AXP). He says Morgan Stanley spun Discover off because it couldn't find a buyer, and with good reason -- the card trails its rivals on nearly every metric: It's accepted by less than 5 million merchants (vs. 9M for AmEx and 25M for Visa and MasterCard); cardholders' 5.4% spending growth is tepid compared to 14.6% for MasterCard and 16.8% for AmEx; gross dollar volume is $115B vs. $562B for AmEx and $1.9T for MasterCard; and its fee is just 1.76% vs. AmEx's 2.41%. Maurer has a Sell rating on the new issue, with a target of $22.

Related Links: Discover Financial Services: The Promise of Morgan Stanley's Spin-offDiscover the Opportunities: Morgan Stanley Spinoff Now Trading When IssuedDiscover to gain independence July 2 in spinoff [Chicago Tribune]

Discover Card 02 07 2007