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Discover Financial Services

Discover Financial Services. November,3 2009 John Kolb. Summary. Current price 14.18 52 week range 4.74 – 17.35 Market cap 7.68B Mid cap value Rating. Company Overview. Operates 1 of two closed-loop credit card networks, the other is operated by American Express.

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Discover Financial Services

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  1. Discover Financial Services November,3 2009 John Kolb

  2. Summary Current price 14.18 52 week range 4.74 – 17.35 Market cap 7.68B Mid cap value Rating

  3. Company Overview Operates 1 of two closed-loop credit card networks, the other is operated by American Express. Issues proprietary cards, extends loans to cardholders, manages transactions from merchants, and operates Discover Bank Has a third party relationship with WMT to issue credit cards with costumers, they also issue debit cards for certain banks.

  4. Overview continued Purchased dinners club from CITI in 2008 Expanded their network globally This purchase has helped Discover take market share from Visa, Master Card and American Express

  5. Key Developments 09/10/2009 Discover signed a deal with Trionis, a European interbank processing network. Discover will now issue ATM Debit/Credit cards to Austria, Switzerland, Portugal, Spain, Luxembourg and Belgium. 07/07/2009 Public Offering of Common Stock 54,054,055 shares were issued at $9.25 per share. Capital contributions may be used for the Company's subsidiary, Discover Bank, possible investments in the Company's businesses, or possible repurchase of fixed rate cumulative perpetual preferred stock issued by Discover to the U.S. Treasury.

  6. Key Developments 03/23/2009 Discover signed a deal with SIX Multipay in Europe to expand merchant acceptance of Discover’s Dinner Club 03/19/2009 Discover announces cut in dividend to $0.02 from $0.06

  7. How Revenue is Derived Student loans $643 Million outstanding (50% Federal backed) Personal loans $1.2 Billion outstanding APR (7.99%-18.99%) Credit transactions $221 Billion in 2008 (1.75% transaction fee) Discover Bank $28 Billion deposits Direct-To-Consumer Deposit Business $7 Billion

  8. How Revenue is Derived

  9. How Revenue is Derived

  10. Volume by Network

  11. Direct Deposit (Billions)

  12. Cross Sectional Analysis

  13. Time Series Analysis

  14. SWOT Analysis Strengths #1 rewards program “Consumer Card Strategies Research Data.” Less loan losses than competitors Strong relationship with Wal-Mart and various banks 4,500 banks, credit unions and financial instutions. Discover Bank

  15. SWOT Analysis Weaknesses Less acceptance than Visa and Mastercard Charge-off rate of 8.39% this is expected to rise between 8.5% and 9% Weaker brand name than American Express

  16. SWOT Analysis Opportunities Substantial growth in global market Positive feedback loop for acceptance More spending volume as consumer confidence increases More savings in the near future as consumers rebuild their accounts

  17. SWOT Analysis Threats Loan loss and charge-offs Lower consumer spending Government regulation Pending legislation

  18. Valuation Morningstar Fair Value 27.00 Consider buying 13.50 My Estimate 31.31

  19. Recommendation Investment rationale DFS has sustained the economic downturn and built up strong cash flows which will continue to keep the company strong They have a great opportunity to gain market share because of an increase in acceptability in the US and the global market Will benefit from more consumer spending and saving with the economic turn around Will continue to benefit from more unemployed financing

  20. Valuation Buy $3,000, 5.5% of portfolio value or 221 shares Buy 5% of AJG to bring us to market weight in financials

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