Discover Selloff (Update 2)
As most stock watchers have noticed by now Discover (DFS) has been hit by a large amount of selling since the spin-off. I think the sell off is occuring for a few different reasons.
Morgan Stanley shareholders don’t want it
Many shareholders of Morgan Stanley might have purchased their shares because they wanted a piece of the investment bank and they have no interest in the payment card industry. This could be true of individual investors and also mutual fund investors. An investor who understands Morgan Stanley’s business model might not understand the Discover business model and decided to sell off.
Last quarter earnings
As most investors know the Discover earnings last quarter were less than expected. This factor could be spooking investors into selling off. There is a perception in the market that Discover is the ugly step-child credit card company and the bad earnings only reinforced this impression.
Momentum selling
As the price of Discover drops I am sure many investors who owned Morgan Stanley and don’t know anything about Discover are getting panicked and out of fear are selling off. It been on a downward trend since the spinoff. Many investors and traders tend to focus on the short term instead of taking a long term view, and in the short term this stock has been a dog.
Final Thoughts
For investors who want to think long term I believe Discover has plenty of room to grow. Now that Discover is independent they can focus on their growth and gaining marketshare. As many investors know Morgan Stanley was hesitant to spin off Discover, and only did it because shareholders forced the issue. Morgan Stanley was content holding onto the Discover cashflow, which historically has been pretty steady.
I believe at this price Discover could be considered a bargain, but only for investors who are content buying and forgetting about it for a year or two.
July 18th, 2007 at 3:25 pm
I could not agree more.
I feel that many of the MS holders feel Discover was bad because it came with Purcell - whom they hate. They could not get rid of it fast enough.
Back in the mid 90’s they blew a lawsuit against Master & Visa which would have enhanced their market position now. They recently won a similar suit and should get some settlement soon.
They know how to make money.
With freedom to grow, they will be fine.
I estimate $1.45 - $1.50 for the next 12 months.
jmho
July 23rd, 2007 at 6:24 pm
What is happening with the anti trust lawsuit against VISA & MA?
There are rumors that DFS might get a “substantial” settlement.
Care to comment on when and how large?
Thanks in advance.
July 23rd, 2007 at 6:37 pm
Stan,
The latest I’ve heard is that the case won’t start until the Fall of 2008. I don’t think the settlement will be as large as some people expect. If you look at MasterCards SEC filings it looks like they’re keeping close to 1B in the bank. I would expect the settlement to be around 1B or less.
If you look at the SEC filings MasterCard lost a court case over debit cards in 2006 and they are paying out $300m over a period of 10 years or so. I would imagine any settlement with Discover and AMX would be very similar in structure. So there won’t be a one time hit to earnings.
As a shareholder in Discover and MasterCard, I would much rather see Discover improve it’s business than have earnings one quarter boosted by a court settlement.
September 21st, 2007 at 6:14 am
DFS 3Q earnings will be announced shortly. Any thoughts?