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Valyooo (33.73)

Why does Discover have such a low multiple?



June 03, 2011 – Comments (6) | RELATED TICKERS: DFS , MA , V

DFS has a multiple of 10.22

V has a multiple of 17.13

MA has a multiple of  18.62

DFS has the highest growth rate.  DFS is the only one to return to its pre-crisis dividend levels.  DFS has the highest growth rate. DFS has full control over its operations.  DFS is the least accepted card, so it has more opportunities for growth.  From personal experience it has the best customer experience.  Plus it has that fast growing student loan segment.

Doesn't DFS deserve a multiple of at least 13-14?

6 Comments – Post Your Own

#1) On June 03, 2011 at 4:48 PM, Momentum21 (96.57) wrote:

V and MA have zero debt. DFS is diversified into banking as well so they are more like AXP and COF

MA and Visa are transaction based businesses. 

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#2) On June 03, 2011 at 7:51 PM, TSIF (99.98) wrote:

Agree with Momentum, can't really compare V and MA to DFS  Transaction based, and VIRTUALLY no debt. Look at DFS's debt load.

They could also get theirself "in trouble" by lower borrowing criteria.  Due to the lower acceptance level, those with good credit have no need for the card. I shred the 4-5 offers I get from them a month, (another expense) without opening them.  Many American's are getting Anti-credit of late.

DFS has had a good two year run, but risk/reward wise, I'd lean to MA.  

Good question, good luck.



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#3) On June 03, 2011 at 8:30 PM, JakilaTheHun (99.92) wrote:

As TSIF and Momentum alluded to, it's a completely different business model.  Discover is a bank.  MA and V are not.

That said, I don't really disagree with your analysis.  I've liked Discover much more than V and MA for quite awhile. 

The thing that people don't understand --- Discover may take some hits, but generally speaking, they didn't fall into the same trap as the other banks during the crisis.  They do engage in some riskier lending, but they get adequate interest rates to compensate for the risk.  Most of the banks were doing risky lending without getting adequate interest rates in return. 

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#4) On June 04, 2011 at 12:33 AM, Valyooo (33.73) wrote:

Jakila, you hit the nail on the head.

As for all of you guys, I know how their business model is different....shame on me for comparing them to V and MA.  Since I only use them for credit cards, I forget that they are not comparable.

Comparing them to AXP, I think they deserve the same multiple though, which would give DFS a 30% increase in price.

I don't remember why, so I guess I can't use this as a real piece of analysis, but I remember thinking their CEO was very good...but again, who knows.

Plus, something else I did some research on a while bank but don't remember....aren't they not getting the same pain as V MA and AXP from anti-trust lawsuits?

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#5) On June 04, 2011 at 12:35 AM, Valyooo (33.73) wrote:

Also, it has a lot of debt...but what bank doesn't?

Idk, I think it is a good business with a high growth rate, in a growing market (at least the credit side).  I think its p/e should be at least equal to the SPY's (14), making the risk/reward nice.  They keep beating earnings estimates.  How much lower than 10 can their p/e grow?  I doubt their E will shrink, and I can't see a multiple of under 10 for a business that isn't having any problems.

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#6) On June 06, 2011 at 2:41 PM, sid1138 (41.18) wrote:

I would stay away from any business that makes its money by lending money.  Consider the following:

- Economic numbers in the US are bad and getting worse
- We are heading to an election season, so those in office will try to stay in office
- We will see an expansion of QE-II to its full limits and maybe a QE-III.
- China is decreasing its USA debt exposure by a LOT.  The US is increasing its debt by a LOT

The net result of all of this is US interest rates will start to increse significantly by either this year or next.  When they increase, we will see a reduction in debt, increased default rates, and in short a squeeze on credit card companies that will make 2009-2010 look tame.  I predict by the summer of 2012, that PE ratio of 10 will be long gone, and it will be at 20-30 - not because prices went up, but earnings dropped through the floor.


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