) credit card business is by far its most well-known, the company
has diversified its offerings to include prepaid cards, student
loans, personal loans and other deposit and lending products. This
expansion in business operations has coincided with a steady rise
in the company's stock since the turn of the year. We have recently
price estimate for Discover Financial's stock to
, which is about 10% ahead of the current market price, and below
we discuss a few key trends that have influenced our valuation.
See our complete analysis of Discover Financial
Direct banking is a key focus area for Discover, as the company
last year acquired a $2.5 billion student-loan portfolio from
) that has since grown to $2.9 billion. Aided by focused marketing,
personal loans offered by the company saw $703 million year-on-year
growth in the second quarter of 2012.
Discover has also recently made a foray into the residential
mortgages business with the acquisition of the Home Loan Center
business from Tree.com and will originate loans to be sold in the
secondary markets. The incursion comes at just the right time, with
mortgage delinquency rates in the U.S. hitting a low of 7.4% and
demand rising once again after the 2008 crash. (See Discover
Financial Enters The Mortgage Business At Just The Right Time for
more details on our stance on Discover's venture) We forecast a
steady growth for Discover's loans business fueled by innovations
like the fixed-rate private student loan product which has seen a
good response in the first few months since its launch.
Larger Share Of Debit Card Market To Come
The Durbin amendment to the Dodd-Frank bill, which came into
effect last October, requires debit cards to carry two unaffiliated
networks. This initiative by the authorities is primarily focused
on ending the duopoly currently held by Visa (
) and MasterCard (
), and will benefit Discover, which is relatively small compared to
the big two. Discover issues debit and ATM cards through its
electronic funds transfer network, PULSE, which the company
acquired in 2005. PULSE observed a massive 25% year-on-year growth
in revenue in the second quarter of this year and has added around
130 card issuers to its network since 2010, increasing
acceptability to over 85% of ATMs in the U.S.
Revenues are likely to increase further, as the Durbin amendment
requires banks to use separate payment processing networks for
signature authorized and PIN authorized debit card transactions. We
expect a migration from Visa and Mastercard's PIN transaction
volume to fuel a growth in transaction volumes.
This growth will further be supplemented by a rise in prepaid
debit products. Prepaid debit cards are gaining increasing
popularity amongst banks and issuers as they are exempt from the
50% reduction in interchange fees, which was also imposed by the
Durbin amendment. Interchange fees were a huge source of profit for
banks, which used the revenues to offer reward program incentives.
These institutions are now disinclined to offer traditional debit
cards, and are shifting focus to their prepaid counterparts.
Core Business Doing Well
Discover continues to innovate to promote its flagship credit
cards. The company recently launched its first affinity card, in
partnership with wetlands and waterfowl conservation group Ducks
Unlimited, (See New Alliance Between Ducks Unlimited And Discover
Financial), targeting the group's 600,000-plus members as a
customer base. The cards business has been performing strongly,
with a 5% year-on-year increase in card sales volumes, observed in
the second quarter of 2012. (See Discover Financial Is Geared Up
For A Lending Recovery)
However, a recent survey by Discover's U.S. Spending Monitor
indicated some negative trends regarding consumer spending with
more than half (53%) of the company's consumers in the U.S.
maintaining flat spending intentions for the next few months due to
a negative view of U.S. economic conditions. Despite this apparent
pessimism among consumers, we maintain a positive outlook for
Discover's credit cards business, which accounts for more than half
of our price estimate for the company.
You can gauge the effect of a change in forecasts on Discover's
valuation by modifying the interactive charts above.
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