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Discover: Visa's Ugly Stepsister

The market is brutal and honest in its judgments. Yesterday, it judged Visa (NYSE: V  ) as the belle of the ball and Discover Financial Services (NYSE: DFS  ) as the ugly little stepsister.

Gee, Discover, you look ugly today
Discover closed down $2.20 yesterday to finish at $15.20 a share, after reporting a 65% drop in profits. The culprit was Discover's sale of its fledging U.K. credit card business for a $158 million loss. If it weren't for that loss, the company would have posted a respectable profit -- at least for this market -- and beaten analyst forecasts. Of course, if it weren't for the fact that it's pouring rain, it would be a great day for a picnic.

Visa, my love
Visa, on the other hand, raised the most money ever on a U.S. IPO, $17.9 billion, and saw its shares soar more than 28%. Visa has bright prospects even in the face of this miserable credit market, because it doesn't lend its own money. Instead, it makes its money by managing transactions and therefore don't assume any credit risk. The market likes that.

Things weren't all bad for Discover. Its revenue increased from the same period a year ago, not an easy feat in this market. However, Discover also set aside $305.6 million for loan losses. Overall, Sanjay Sakhrani, credit card analyst at Keefe, Bruyette & Woods, said Discover had a "solid quarter in the face of a deteriorating economy."

Its been a rough ride
Discover Financial was spun off from Morgan Stanley (NYSE: MS  ) last June, into a rough market for credit lenders. Since July, the stock has fallen more than 40%.

All things considered, though, Discover has had an OK showing in a terrible market. When things in the consumer credit market get better, this will be a good company to own. I think it will be worth investors' time to bottom-fish this company at some point this year. But until then, Visa looks like the place to be.

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Related Tickers

10/26/2016 4:01 PM
DFS $56.89 Up +0.75 +1.34%
Discover Financial… CAPS Rating: *****
MS $33.59 Up +0.24 +0.72%
Morgan Stanley CAPS Rating: ****
V $81.75 Down -0.28 -0.34%
Visa CAPS Rating: *****