The 2 Largest Value Drivers for Discover Financial

By
A A A

Discover Financial Services ( DFS ) 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 ( COF ), American Express ( AXP ), Visa ( V ) and MasterCard ( MA ).

We have $20.99 price estimate for Discover Financial, which is around 10-15% below market price. Below we look at two key business divisions for Discover Financial that have significant impact on its stock price.

Discover Financial's 2 Most Important Divisions - A Snapshot

1) Discover Credit Cards - 56% of the company's stock value

Discover currently has the  #4 position in the U.S. payment-card network, after Visa, MasterCard and American Express. Discover earns a net interest income on the spread between the rate at which it raises funds in the form of debt and customer deposits, and the rate at which it extends credit to credit card customers. In 2010, Discover earned a net interest yield of 9.5% on about $45.6 billion credit card loans outstanding. Going forward, we expect Discover's credit card loans outstanding to increase to $64 billion by the end of our forecast period, while its net interest yield will likely remain stable at the current value.

See the top forecasts for the Discover credit cards

2) Discover Card Transaction & Execution Fees - 19% of the company's stock value

Discover charges discount and interchange fees to merchants that have entered into card acceptance agreements with Discover for processing credit card purchases. These fees are typically charged as a percentage of total purchase volume on Discover branded credit cards. In addition to these, Discover also charges merchant fees per transaction for various services including manual authorization of transactions and delivery of hardcopy statements. In 2010, Discover generated about $1.1 billion in revenues from card transaction and execution fees. Going forward, we expect 3-5% annual growth in revenues over our forecast period.

See the top forecasts for the Discover card transaction and execution fees

See our full analysis for Discover Financial stock here



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AXP , COF , DFS , MA , V

Trefis

Trefis

More from Trefis:

Related Videos

Stocks

Referenced

Most Active by Volume

48,099,947
  • $16.09 ▲ 0.50%
40,277,806
  • $102.50 ▲ 0.24%
40,236,499
  • $19.57 ▲ 2.35%
31,092,510
  • $49.75 ▲ 0.65%
30,795,218
  • $34.92 ▲ 0.78%
29,910,855
  • $3.63 ▲ 0.83%
24,019,154
  • $13.06 ▼ 0.38%
23,753,906
  • $74.82 ▲ 1.31%
As of 8/29/2014, 04:04 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com