Key Drivers to Discover Credit Cards' Stock

Discover Credit Cards is the most valuable segment for Discover Financial Services ( DFS ). According to our analysis, it constitutes more than half of the total value of the company. Discover Financial Services is a direct banking and payment services company that offers credit cards, student loans, personal loans and deposit products. It competes with other financial firms like Capital One ( COF ), American Express ( AXP ), Visa ( V ) and MasterCard ( MA ).

We have a price estimate of $20.99 on Discover's stock , which is about 12% below the current market price.

Discover Credit Cards at a Glance

Discover provide credit cards to its customers and earns interest income on the outstanding balance. The rate earned equals the average spread between the rate it charges customers and the at which it raises funds in the form of debt and what it pays on customer deposits. To fund operations, the company has a variety of sources of funds including short and tong term corporate debt, customer deposits and borrowings from the Federal Reserve. Credit cards generally carry a higher rate of return than other forms of credit and varies depending on the creditworthiness of the card member.

Customers choose Discover credit cards because of its presence in over 30 countries and a network of more than 4,400 financial institutions.

Key Drivers of Discover Credit Cards

1. Net Interest Yield

Net interest yield ranged between 8% and 9.5% levels during 2008 to 2010. The increase in 2009 was mainly because of the changes in the pricing policy including charging higher standard annual percentage rates and substantially reducing promotional offers due to the availability of cheap funding available from the Federal Reserve. Going forward, we expect the net yield to remain stable during the Trefis forecast period.

2. Discover Sales Volume

In 2008, Discover sales volume was $106 billion. In 2009, Discover sales volume declined to $95 billion largely due to lower gasoline prices but also due to the weak economic environment but recovered to $99 billion in 2010. Going forward, we expect Discover sales volume to grow at around 5% during the Trefis forecast period.

See our full analysis of Discover Financial Services

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

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

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