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Investment Overview for Discover (NYSE:DFS)
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Below we look at the key drivers which present upside or downside to our price estimate for Discover Financial.
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Average Credit Card Loans Outstanding Discover's average credit card loans outstanding increased from 2008 to 2009. In 2010 and 2011, total loans outstanding dropped slightly as consumers deleveraged following the economic downturn but saw a recovery in 2012. We expect total loans outstanding to increase gradually as economic conditions eventually improve (primarily declining unemployment and improved consumer sentiment). We expect the average credit card loans to grow at an annual rate of 3-5% and reach $58 billion by the end of the Trefis forecast period. However, there is a 10% upside to our price estimate if economic conditions recover more rapidly than we expect and loans outstanding reach $80 billion by the end of our forecast period.
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Provision for Losses as % of Average Credit Card Loans Provision for losses is an expense item which represents an estimate of losses on the outstanding loan balance. It is estimated by management given the composition of its credit portfolios, the probability of default, the economic environment and the allowance for credit losses already established. This figure declined in 2011 and 2012 due to a reduction in the loan loss reserve rate and a decline in the level of net charge-offs and we expect it stabilize at about 1.6% of average credit card loans. There is a 7% downside to our price estimate of Discover if it returns to 3% by the end of our forecast period.
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Discover Financial Services is a leading credit card issuer in the United States and an electronic payment services company. In March 2009, it became a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act, in connection with its participation in the U.S. Treasury’s Capital Purchase Program (“CPP”).
The firm offers credit cards, personal and student loans, and deposit products. It operates the Discover Network, a credit card payments network ; the PULSE Network (“PULSE”), its ATM, debit and electronic funds transfer network, and Diners Club International (Diners Club), its global payments network.
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Strong position in student loan market
With the acquisition of Citigroup's Student Loan Corporation, Discover became the third-largest student lender in the U.S.
Strong position in credit card market
Discover currently has the # 4 position in the U.S. payment-card network, after Visa, MasterCard and American Express. We expect the company to maintain this strong position throughout our forecast period.
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Below are some trends which could have a significant impact on Discover and the credit card industry in general:
- Greater use of credit and debit cards: Americans spent more using cards than with either cash or checks for the first time in 2006 and the trend is only expected to continue into the future. Even outside the U.S., there has been increasing use of cards for making payments.
- Growth in Online Shopping: Cards are a preferred mode of payment for online shopping. Online retail sales in the U.S. have been growing at a staggering rate over the past decade. The card transactions volumes have moved from predominantly travel sales (air tickets, car rentals and hotel reservations) to non-travel and entertainment (T&E) areas such as personal and home care products, electronics, books and clothing. Rising online sales are expected to benefit card transaction volumes.
- Credit CARD Act: The U.S. government in February 2010 passed into legislation the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, which enforces more disclosure about interest rates, caps on service fee within the first year, well-defined grace periods and also makes it difficult for people under the age of 21 to obtain cards. This will pressure total cards outstanding.
- Growth In Mobile Payments: Mobile phone payments are rapidly gaining popularity, coinciding with the surge in smartphone sales. Although the technology is still in a nascent phase of development, mobile payments already account for 5% of retail store sales in the U.S. This number expected to rise to 19%, by 2016 as an increasing number of phones incorporate near-field communication (NFC) chips to facilitate mobile payments. As most mobile payments are linked to credit or debit cards, this should drive volumes.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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