The company:
Discover Financial Services (DFS) is a large-cap (37B) company trading on the NYSE. The company operates in payment services and digital banking. The payment services segment consists of a variety of services and products including the PULSE network, Diners Club International, and the Discover Network. The PULSE network is a debit, atm, and digital fund transfer system. The Diner Club International is a credit service offered to customers outside of the US with an emphasis on travel. The Discover Network handles transacting and settlement services. The digital banking portion consists of debit and credit cards, loans (private student loans, personal, home), depositing, money market, IRA deposits and savings, checking accounts, and sweep accounts.
Advantages:
Advantages:
Cash isn’t widely used since the introduction of debit and credit cards. Using cards definitely add value to users. If you lose a credit card, you can simply call the company and cancel the card. If an odd transaction occurs, the card company can flag that transaction and inform you. If a transaction was made that wasn’t you, you can decline the transaction and get your money back. For using your credit card, the issuer can typically earn money. With all this said, Discovers earns money from every transaction and interest from unpaid debt.
Debit cards have simply served as a place to have your paycheck deposited, for me anyways. It’s a way to directly access my checking account, but any transaction I make is typically done using credit cards. Discover has made checking accounts more valuable to their customers by offering rewards for holding money in their checking account. Discover profits by investing money from these accounts.
The buy-now-pay-later services offered by other companies are a risk. I will cover that more in the disadvantages, but one positive that’s happening in the relationships developing with the new competition, such as Sezzle. Discover’s services work alongside Sezzle’s buy now pay later options so that discover is accepted as a form of payment.
DFS is exposed to all the risks associated with interest rates. Discover is diversified throughout many parts of the financial sector by offering a wide variety of services. If a customer would like Discover for all their financial needs, they could. Investing, banking, credit cards, loans, buy-now-pay-later, ATM, etc. I think having good services for all of these reduces the risk. If interest rates rise, users invest more, spend more, take out more loans, etc. If interest rates rise, DFS makes more off savings and debit accounts, and loans in general.
Discover’s customers typically have credit scores over 660. This usually includes the middle-income class, which are usually low risk. If there was another financial crisis, I would get a little more concerned because these types of jobs are usually at risk, and their savings rates are historically lower. Let’s be honest though, in a recession, everything's at risk. A positive for the middle class is wages are rising. In general, this is a positive for Discover.
Disadvantages:
Debit cards have simply served as a place to have your paycheck deposited, for me anyways. It’s a way to directly access my checking account, but any transaction I make is typically done using credit cards. Discover has made checking accounts more valuable to their customers by offering rewards for holding money in their checking account. Discover profits by investing money from these accounts.
The buy-now-pay-later services offered by other companies are a risk. I will cover that more in the disadvantages, but one positive that’s happening in the relationships developing with the new competition, such as Sezzle. Discover’s services work alongside Sezzle’s buy now pay later options so that discover is accepted as a form of payment.
DFS is exposed to all the risks associated with interest rates. Discover is diversified throughout many parts of the financial sector by offering a wide variety of services. If a customer would like Discover for all their financial needs, they could. Investing, banking, credit cards, loans, buy-now-pay-later, ATM, etc. I think having good services for all of these reduces the risk. If interest rates rise, users invest more, spend more, take out more loans, etc. If interest rates rise, DFS makes more off savings and debit accounts, and loans in general.
Discover’s customers typically have credit scores over 660. This usually includes the middle-income class, which are usually low risk. If there was another financial crisis, I would get a little more concerned because these types of jobs are usually at risk, and their savings rates are historically lower. Let’s be honest though, in a recession, everything's at risk. A positive for the middle class is wages are rising. In general, this is a positive for Discover.
Disadvantages:
Discover is global but it lags behind competitors. Mastercard is accepted in 210 countries, Visa is accepted in 200 countries, American in 100 countries, and Discover is accepted in 185 countries. Listing from largest to smallest in the US, Visa, Master Card, and American Express, Discover. In a way it could be a positive considering there is growth potential.
Visa and Mastercard only manage and process credit card transactions. Meaning, they don’t issue the credit card, they don’t manage the financing, they don’t take the bulk of the risk. American Express and Discover handle both issuing and financing. Min summary, they take on more risk than Mastercard and Visa.
The buy-now-pay-later-services will hurt credit card companies if successful. Credit card companies make money by loaning money at interest. If you pay them by the end of your monthly bill, you pay no interest, if you don’t, you get charged interest. For buy now pay later, you can set up a payment plan to buy a product that you currently cannot afford or wish to pay overtime. In summary, this eliminates the need for credit card companies. These companies are taking on high risks. I’m not sure what happens if you don’t repay your debt, either the company or consumer takes on high risk. We are still in the infancy stages of this service; it’ll take some time before we know if it’s successful or not.
In general credit card companies can have a bad rap. Taking on excessive debt is a terrible thing and considerable effort is put into making sure future generations do not make that mistake. In good financial times, you don’t hear bad publicity about credit card companies, but when times are rough, they catch a bad light in the news.
Valuation and current state:
Visa and Mastercard only manage and process credit card transactions. Meaning, they don’t issue the credit card, they don’t manage the financing, they don’t take the bulk of the risk. American Express and Discover handle both issuing and financing. Min summary, they take on more risk than Mastercard and Visa.
The buy-now-pay-later-services will hurt credit card companies if successful. Credit card companies make money by loaning money at interest. If you pay them by the end of your monthly bill, you pay no interest, if you don’t, you get charged interest. For buy now pay later, you can set up a payment plan to buy a product that you currently cannot afford or wish to pay overtime. In summary, this eliminates the need for credit card companies. These companies are taking on high risks. I’m not sure what happens if you don’t repay your debt, either the company or consumer takes on high risk. We are still in the infancy stages of this service; it’ll take some time before we know if it’s successful or not.
In general credit card companies can have a bad rap. Taking on excessive debt is a terrible thing and considerable effort is put into making sure future generations do not make that mistake. In good financial times, you don’t hear bad publicity about credit card companies, but when times are rough, they catch a bad light in the news.
Valuation and current state:
DFS valuation is attractive. Market cap = 36.8B, PE = 7.7, EV/FCF = 7, cash/debt = 0.78, ROE_5yr = 22%, profit margin_5yr = 22%. The market cap for this company is low compared to main competitors (V, MA, AXP). If this company continues to operate well, I think it’s responsible for this company to get to a similar market cap within the next 5 to 10 years. Keep in mind this is a “back of a napkin calculation”, take it for a grain of salt. Comparing the valuation values from its 5-year average and competitors, it looks cheap as well. The financial statements show growth and consistency. Revenue, net profit, and FCF have been steady and slowly growing over the past ten years. The only thing that does stick out a little is the stagnate shareholder equity. Using a 3yr FCF average and a conservative growth estimate, the company produces a nice IRR.
Final thoughts:
Final thoughts:
I like the company as it could be a good opportunity. The company has potential due to its relatively small size and operational growth. The diversity of the company also adds some reassurance. The biggest risk I see for the company is a recession and the buy now pay later services. I think they have a strong enough customer base to stay relevant.
Links:
https://www.paymentsdive.com/news/discover-invests-30-million-in-bnpl-company-sezzle/603580/
https://investorrelations.discover.com/newsroom/press-releases/press-release-details/2021/Discover-Signs-Agreement-to-Help-Expand-Acceptance-of-Sezzles-Buy-Now-Pay-Later-Feature/default.aspx
https://somethingbluebride.com/pages/sezzle
https://www.nerdwallet.com/article/credit-cards/how-discover-amex-different-from-visa-mastercard
https://www.thebalance.com/key-differences-between-visa-mastercard-discover-and-american-express-4588450
https://www.creditcards.com/credit-card-news/visa-mastercard-amex-discover-difference/
https://www.valuepenguin.com/where-visa-mastercard-american-express-discover-accepted
https://finance.yahoo.com/quote/DFS?p=DFS&.tsrc=fin-srch
https://app.tikr.com/markets?fid=1
https://www.morningstar.com/stocks/xnys/dfs/quote
https://www.paymentsdive.com/news/discover-invests-30-million-in-bnpl-company-sezzle/603580/
https://investorrelations.discover.com/newsroom/press-releases/press-release-details/2021/Discover-Signs-Agreement-to-Help-Expand-Acceptance-of-Sezzles-Buy-Now-Pay-Later-Feature/default.aspx
https://somethingbluebride.com/pages/sezzle
https://www.nerdwallet.com/article/credit-cards/how-discover-amex-different-from-visa-mastercard
https://www.thebalance.com/key-differences-between-visa-mastercard-discover-and-american-express-4588450
https://www.creditcards.com/credit-card-news/visa-mastercard-amex-discover-difference/
https://www.valuepenguin.com/where-visa-mastercard-american-express-discover-accepted
https://finance.yahoo.com/quote/DFS?p=DFS&.tsrc=fin-srch
https://app.tikr.com/markets?fid=1
https://www.morningstar.com/stocks/xnys/dfs/quote
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