Discover Financial: A Creditable Investment - Barron's

Discover Financial (DFS) has long lagged behind American Express (AXP), MasterCard (MA) and Visa (V) in the credit card market. Its focus on slow and selective growth has netted it just 7% in Q1 of the $666B in combined outstandings of Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C) with market shares of over 20% each, and Capital One (COF) and American Express (AXP) with shares of 10% each. Still, Barron's says Discover's slow, methodical growth has its advantages, and thinks the stock is poised to rise.

Discover's conservative credit policy means it is less likely to be hurt by the wave of loan charge-offs now hitting the industry. The company has been negotiating several deals that will expand its market share in the U.S. and internationally to levels close to Visa and MasterCard. Since Discover not only issues credit cards but also does its own transaction processing, higher market share helps both the credit side of the business and increases processing efficiencies.

In addition to Discover's stand-alone strength, the company could also be a potential buyout target. With its Friday closing price of $16.42, a buyout could generate a premium of 20-30% from an acquirer looking to scale up credit-card issuance and processing.

• William Ryan of Portales Partners thinks a Discovery takeover bid could be in the high 20s to low 30s.

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• Discover reported this month that its consumer spending index reached its highest level so far this year. This marks the second consecutive month with a positive outlook, and could be a sign that consumer spending is starting to recover.

Comments

[fatcat:]

I had a Discover card,but found it hard to use,because many establishments don't accept it...same with Amex,but to a lesser degree..

In this economic mess,I don't see much chance for growth for DFS.

2008 Sep 07 08:03 AM

[fatcat:]

Rachael,I see you live in Israel..great place to visit,wouldn't want to live there,but I'm not Jewish.That might make the difference.

If you could write about Israeli businesses,it would be greatly received,IMO. Thanks.

2008 Sep 07 08:12 AM

[adan:]

my only concern in your article was your comment that consumer spending might be recovering - if it is, it seems to be more of a debt add on right now than the processing of daily expenses via the convenience of cc use, and then paid off each month

i'm not sure adding to permanent growing debt will eventually help discover or the consumer, at least in a declining economy

we've used discover for both cc use, cd's, and money markets for many years, so this is not meant as a dig to them; strictly a comment re debt use at this time

thanks though, interesting article

2008 Sep 07 08:37 AM

[legmaker:]

I believe you are right on with this one. I do believe that all of the companies in this sector are poised for a move higher as consumer spending has been a worry. I think they are a buyout possibility and at these levels are cheap.

2008 Sep 07 09:40 AM

[tilut:]

I mentionned several times in my comments here that DFS was outrageously undervalued.Now that Barron wrote this article, I hope it will help DFS stock price but have hesitation since this market is crazy and sick, though longer term DFS is a sure bet according to me. More, in their article they even not mentionned the potential settlement with MA and V that I beleive will be annouced soon and may represents several billions$ for DFS and alone add between 4$ and 10$ to the stock price.

2008 Sep 07 10:17 AM

[tipalia:]

tilut ,agree, so undervalued that I sold it couldn t take it any more.
By the way it seems to me that the settlement has already been announced.Could somebody confirm either way? and if you have the
exact numbers it would be appreciated. Thanks

2008 Sep 07 11:27 AM

[Gigs:]

While I like the premise of your article, (I own the stock), Your math on a buyout does not compute. Your claim of a 20% to 30% premieum brings you to the high teens low twenties, whereas to support William Ryan of Portales Partners claim of high twenties to low thirties, that premeium would require a 60% to a 110% premeium. again all based on fridays close of 16.42

2008 Sep 07 01:05 PM

[tilut:]

User 138602: I understand your frustration with DFS stock price and that you gave up because I went through the same feeling but I sold only a small portion of my stake so far to respect my margin restrictions.I can comfirm you that no settlement has been announced since I follow that stock on a daily basis and would have heard of.My understanding is that DFS is seeking 6 billions$ and that the trial should begin this month if there is no settlement before. To Gigs:You are right with your math but these numbers are those mentionned in Barron article.When I read that article I noticed that too,I think Ryan was talking of a premium of 60% to 110% which appears much more realistic given the low price of the stock.

2008 Sep 08 07:51 AM

[Credit Card...:]

Rachael,

Thanks for the great post. We agree with Barron's general thesis about Discover and actually commented on their prospects as a takeover target at the beginning of July in a research post on our site called "Do Discover's Skills Make it an Acquisition Target?"

It is not just their methodical growth, however, as Discover has other operational competencies and assets that make them attractive. Beyond their methodical growth, they have a customer base they understand, good solid customer service and a payments network (currently subscale) which a larger buyer could likely do something with and value to provide some leverage when negotiating with MasterCard and Visa.

The post for those interested is at creditcardindustryrese.../.

Sincerely,
Dominic
Research Director
Credit Card Industry Research
creditcardindustryrese...

2008 Sep 08 06:53 PM

[mrbill for V:]

Dominic: Your website is a really good one , i will look forward to your research on Visa.

2008 Sep 10 03:11 PM

[V Winner:]

For those of you intersted in Visa- (or MA/AXP/DFS)- come take a look at our blog- it is the only blog on the web that exclusively covers this sector:

www.vwinners.com

2008 Sep 11 07:19 AM

[mrbill for V:]

For those of you interested in Visa, Mastercard etc. There are many many blogs on the web devoted to credit cards such as.

blogtoplist.com/rss/vi...

blogtoplist.com/rss/ma... etc.

2008 Sep 11 09:23 AM

[V Winner:]

Mr. Bill- Those are not Visa or Mastercard blogs. I hope you are joking- if anyone clicks those links they will find news about people getting TRAVEL VISA's.

I realize you are a jealous freak as you have been stalking me and our members online for quite some time- but come on now....

Yes- folks- go find out about a travel visa to China- but if you want to know about Visa (the stock) come check out our blog.

Mr. Bill- you really do need to have your head examined.

2008 Sep 11 08:38 PM

[mrbill for V:]

PUBLIC NOTICE: VWINNER is now officially VLOSER and will be referred to as such. No mention was made of you in these posts but since you cannot resist being totally disrespectful of myself and others from this moment forward i will call you out on every post. There is no way you are a VWINNER such a person would be a true leader with great vision and respect for all, a VLOSER like yourself spends all of his time on the web hammering people just like you. Your website is garbage that is why you can't leave Seeking Alpha alone, when you make a post you are also the one to comment several times on your own post. This is what you do for a living.I recommend any clear thinking person visit the VLOSER site and see for themselves As for heads being examined I recommend everyone read your past posts and they will learn why only three people regularly post on your site. You will never change but will certainly go broke as there is no chance you are a successful business person, you know it is true VLOSER. So VLOSER tell us what is your hot tip of the week? Tell us all about the big money you make like you brag in many earlier posts. You have harmed so many people already because they thought you were a stock broker on Wall Street when in fact you really know what you are, The people need me to alert them to your games. Quit playing games own up to it VLOSER. You will never win you have me to remind you of the situation. Remember KZOINK and what you did to him. Please people read his past posts and tell me who is the VLOSER. However shortly your clowns from your site will soon add to this discussion i will guarantee it.

2008 Sep 12 06:10 AM

[V Winner:]

Mr- Bill- You are only proving what a freak you are. But you did say one intelligent thing- go to the Visa blog and see for yourself if there is something of value for a Visa investor. I don't know why you are so offended by the mere fact that I created a blog for Visa Investors. The only place I put a link to my blog is on posts for VISA. Obviously no-one but you seems to be offended.

Anyway- if you are an investor- feel free to check out the blog yourself.

vwinners.com

Bill- seriously man- stop worrying about what other people say- you are working yourself into a frenzy.

2008 Sep 12 08:01 AM

[mrbill for V:]

VLOSER no frenzy here just making sure the new members know who they are dealing with. Are you saying you are a registered New York State Stock Broker? This is what you tell everyone. I am respectful enough not to mention you by name, but those who do know you should check. Here is the link.
www.oag.state.ny.us/in...

2008 Sep 12 08:17 AM

[V Winner:]

Mr. Bill- I've owned two brokerages and sold both. I am in the metals business now- so thanks for the info pal. Again, other than the fact that I fear you have a sexual identity problem- I see no reason for the rabid obsession for another man.

For those of you that are actually sane- feel free to check out our blog:

vwinners.com

We cover Visa, MasterCard, Discover, and American Express. See you there.

Mr. Bill- get a life- I'm not selling stock - i'm just an investor.

2008 Sep 12 03:27 PM

[V Winner:]

Oh- and Mr. Bill- I dedicated a new post to you:

www.vwinners.com/2008/...

2008 Sep 12 04:25 PM

[mrbill for V:]

VLOSER I could care less if you devote the entire site to me, you didn't start the site in the first place. VISAGLOBALWINNERS remember?

2008 Sep 12 05:13 PM

[mrbill for V:]

You "owned and sold two brokerages" but didn't bother to be registered yourself?, nice try VLOSER we all believe that. My fourth challenge to you is "Prove it" what's the names it's easy to look up, of course you can't provide that because it is an illusion like everything else in your life.

2008 Sep 12 05:36 PM

[V Winner:]

Yes- I remember Visaglobalwinners retard- as we shortened the name to
vwinners.com - IE: It is the same site.

As far as the firms I owned they were SUBS of an even LARGER company that I owned as well. I don't have to prove anything to you- those that know me - know me well and have done business with me for years (and in some cases) decades. When you own a brokerage you don't need to be a rep- but you obviously can't imagine something beyond your own paltry view of life. If you read my blog you will see that members have come to visit me in NYC- and since you know so much about me give me a call if you ever make it to Wall Street.

By the way- do you own anything yourself? Have you ever started a business? I imagine you being a guy living in his mom's basement with so much anger and resentment he has nothing to do but run spend countless hours insulting people. Am I right?

In all this time I have yet to see you create a blog, write a serious (more than one paragraph post) on Visa, mention a business that you own, make a prediction, mention a company or a business you own or started. NADA. Yet your jealousy and insecurity forces you to write post after post about your biggest obsession: ME. Thank you for the entertainment and allowing me to have so much power over your emotions. After you insulted me it provides me with great pleasure knowing that I am causing your blood to boil.

For those of you more interested in Visa- I created a blog that centers around the company and its prospects. Come take a look and judge for yourself:

vwinners.com

2008 Sep 13 02:24 PM

[V Winner:]

We have begun following Discover Financial Services (DFS).

Some links:

The Virtues of Flameproof Plastic (DFS)

www.vwinners.com/2008/...

Discover's (DFS) slow and steady strategy pays off

www.vwinners.com/2008/...

Some US credit card proposals go to far

www.vwinners.com/2008/...

Discover Financial Services (DFS) to Announce Q 3 Earnings

www.vwinners.com/2008/...

Credit and Debit Coverage to Expand

www.vwinners.com/2008/...

Tribute to time-wasting- non-productive and negative people like Bill:

A Discussion on NERD RAGE

www.vwinners.com/2008/...

2008 Sep 14 12:43 PM

[Brazil Inve...:]

A testimonial to Jon
I’ve been reading these posts and am a partner’s of Jon’s on a project we have been heading up for some time now.
This goes out to ‘Mr. Bill’ and all the other sniveling whiners that like to hide behind their computers while hurling insults. Jon is well known on Wall Street by a LOT of people and has been for some time.
Jon puts out more information than anyone I’ve ever met- and has helped a lot of people.

I see people saying that they are “nationally known” and are successful but I see no proof. So to those of you that want to attack an associate of mine- why not post your resume on the net, the name of one deal that you’ve done- or the name of anything you built? Why- BECAUSE THERE ARE NONE- that’s why.

I can personally attest to the fact that Jon is a man of action- and there are dozens more that will do the same. I suggest that you stick to the mission and if you want to have some kind of contest why not do one that counts and put out more and better information as that is why we come here- no to hear someone that is unwilling to come out of the closet and prove their own substance.

2008 Sep 14 10:54 PM