Mastercard's been much loved stock, though it has lost some of its momentum recently. American Express is best-of-breed that's much more attractive to us value investors due to reasons I don't want to go into here. If markets turn favorable to IPO's, we should the largest of them all, Visa, make its debut in the capital markets as well.
Discover was spun out of Morgan Stanley recently. It's down approx. 23% since it started trading and looks spinoff effect has made it quite attractive for us to jump in at this $22-23 range. There hasn't been much love felt towards financials recently and that hasn't helped the stock either. With all the better companies I mentioned above, nobody seems to want Discover. This looks like the ideal spinoff opportunity Joel Greenblatt wrote about in 'You can be a Stock Market Genius'.
CEO David Nelms and CFO Roy Guthrie, have 1,105,515 and 254,748 shares in stock options tied to their names. Now that they can run Discover on its own merit rather than according to guidelines set by Morgan Stanley, I think management will run the business as best as they can to ensure their stock options do not expire worthless. And I'm hitching ride along with them.
Discover is a pretty inferior business compared to others.
- It's cards are the least accepted.
- Half of their accounts are inactive as Discover tends be a second card for most people.
- Slower growth in card volume (amount spent by card holders).
- It's revenue mix is off a much lower quality than American Express.
This less than ideal company is going to be underowned for a while, so this special situations opportunity may take awhile to materialize. But this is an excellent entry point at a great discount.
Disclosure: I also own American Express (AXP) in addition to Discover.
Reference: Morningstar analysis
$22.6 (08/09/07)
