Discover Financial Services
) is a leading credit card issuer in the United States and an
electronic payment services company. The firm offers credit cards,
personal and student loans, and deposit products. It competes with
other financial firms like Capital One (
), Visa (
) and MasterCard (
Discover recently conducted a Holiday Shopping Survey, which
examines holiday spending intentions and trends for the upcoming
holiday season. Of respondents, 38% are planning to spend less in
this holiday season showing an uptick in confidence and a striking
62% of the respondents indicated that they will use cash to pay for
most of their holiday purchases this season while 23% indicated
that they will use credit for holiday spending.
Any decline in use of credit card in this holiday season can
have an impact on Discover whose credit card division makes up 18%
$17 Trefis prices estimate for Discover
, which is around 8% below the market price.
Discover's Sales Volume Trend to Rise
The total amount of purchases made on Discover credit cards
declined in 2009 due to the weak economic environment but we
estimate that Discover's sales on credit card will show an
increasing trend moving forward and will reach almost $116 billion
by 2013 from around $100 billion in 2010. We are optimistic on our
estimate largely because of the shift away from paper based
transactions which will drive sales on credit cards and debit
cards. In 2009, there were still $8.9 trillion transactions in the
US that were paper based which we expect to decline gradually.
However, as consumers appear to be very cautious in their
holiday spending this year and they plan to use cash rather than
taking on more credit card debt, the increase in Discover's sales
volume may not be up to over expectations if this conservative
trend in consumer spending is witnessed over the Trefis forecast
There could be 2-3% downside to our estimate of Discover's stock
price if its sales volume remained around current levels in the
Securitized Loan Amount Will Also Be Impacted
A decrease in sales volume will have an indirect impact on
Discover's securitized loan amounts. A part of the total credit
card loans that Discover provide to its customers is transferred to
other financial firms or investors at a prefixed rate of return.
This process is know as securitization. Income is earned on
securitized loans because of excess spread on loan amount.
A stagnant sales volume would lead to a stagnation in average
securitized loans at the current level of about $25 billion instead
of our forecast of $27 billion by 2013. This would result in an
additional 7-8% decline in our price estimate for Discover.
In summary, if the decline in consumer spending is short
lived, the impact on Discover's stock price will be minimal - but
a prolonged decline in spending could have almost 10% negative
impact on Discover's stock price.