The Green Sheet Online Edition
July 09, 2007 • Issue 07:07:01
Discover flying solo
Like a baby bird cast from its nest, Discover Financial Services LLC has left the Morgan Stanley fold. The Discover brand, which has consistently lagged behind bankcards and American Express Co. as a favored payment instrument, is now an independent company trading as DFS on the New York Stock Exchange.
Trading began July 2, following a distribution of Discover common stock to Morgan Stanley shareholders. They received one share of Discover for every two shares of Morgan Stanley common stock.
At the market close on its debut day, DFS was trading at $30.15 per share.
Leading up to the spinoff, Discover was trading at $31 on a when-issued basis, which works out to about 15 times estimated per-share earnings for 2007, according to Rick Biggs, an Analyst with Bankstocks.com.
Some analysts have said the offering was overpriced, but in a June 22 report, Biggs said it was too early to tell. "[W]hile Discover's current $31 when-issued price might seem high, it may not be unreasonable," he wrote. The lack of similar companies to compare with Discover makes it tough to evaluate, he noted.
The closest comparison is AmEx, which trades at just over 16 times earnings "but with a much superior franchise," Biggs wrote. Biggs added that the per-share price could drop by 15% post-spinoff as long-time stockholders reassess their investments.
Discover's move follows MasterCard's change to public company status in 2006, which went off at $46 a share. On July 2, MasterCard stock was trading at nearly four times that price, $166.18.
A growing public flock
Visa Inc., meanwhile, is preparing to take itself public by early 2008. Industry Consultant Paul Martaus suggested Discover's timing could bode well. "There are plenty of eyes on financial services stocks these days, especially with First Data going private," Martaus said.
The private equity firm Kohlberg Kravis Roberts & Co. announced it would pay $29 billion for First Data Corp., or about $34 a share.
First Data is the largest transaction acquiring company in the United States, and a leading provider of card-issuing and related payment services. On July 2, the company's stock was trading at $32.75 a share. "I expect a lot of that money will get parked in Discover," Martaus said.
Discover claims 50 million-plus cardholders and more than 4,200 card issuers. The company's two networks (Discover Card and the Pulse EFT debit card system) handled over 3 billion transactions through 4 million-plus merchant and ATM locations in 2006, according to Morgan Stanley.
For the fiscal quarter ending on May 31, Discover saw net income of $209 million compared with $343 million during the same quarter of 2006.
Managed card receivables totaled $51.4 billion as of May 31, reflecting year-over-year growth of 6%. Sales volume was also up 6% over the second quarter of 2006 and totaled $25.4 billion. Transaction volume on Discover and Pulse, combined, grew 14%.
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