Discover Stock Off to Ho-Hum Start

Investors had a tepid response to the stock of Discover Financial Services that began trading this morning, down nearly 2.3 percent to $27.82 in midday trading. Discover had been trading since June 14 on a “when issued” basis as investors waited for its official first day of trading.

Stock analysts haven’t been excited by the stock according to a round-up today by the Associated Press. The news service reported Keefe Bruyette initiated coverage with a “market perform rating” and a $30 price target in the next 12 months; Thomas Weisel Partners gave it an “overweight” rating and a 12 month target of $34; and Calyon Securities gave Discover a sell rating and a target of $24. UBS Securities initiated coverage today with a neutral rating.

Discover is a credit card issuer and network, with more than 19.7 million active cardholders, $50 billion in receivables, and a network of more than 4 million merchant locations where the card is accepted in the U.S. and United Kingdom. Discover also owns the Pulse ATM/debit card network that includes more than 4,400 financial institutions that run debit transactions over the network. Discover earns a fee for each transaction. Discover reported revenues of $4.3 billion for fiscal 2006.

Discover is the smallest of the four major electronic payment brands, trailing rivals American Express Co., MasterCard and Visa. MasterCard claims 1 billion debit, credit and stored-value cards carry its brand around the world, and that its card is accepted at more than 24 million merchant locations.

Visa reports it has 1.3 billion cards carrying its brand with total payments and cash volume of $3.2 trillion. Visa claims 26 million merchant outlets.

America Express has a smaller but more affluent group of cardholders that typically use its card for larger purchases. AmEx reported revenues of $27.1 billion in 2006.

Discover charges merchants a lower discount fee for accepting its card than its competitors. Figures vary but analysts have reported in recent ears that American Express charges a fee as high as 2.4 percent of the purchase price, Visa and MasterCard fees average closer to 2 percent of the purchase, and Discover’s fees are closer to 1.6 percent of the purchase.

MasterCard went public at $39 a share in May of last year but its shares have skyrocketed to about $160 in recent trading. Visa is preparing to go public, possibly by the first quarter of 2008. AmEx is a part of the Dow Jones Industrial Average.

Investors have been watching Discover closely since parent Morgan Stanley announced in December 2006 it would spin it off. A Morgan Stanley investor receives one share of Discover for every two shares of Morgan Stanley she holds.

Discover’s ticker symbol is DFS. It replaces ADC Telecommunications in the S&P 500 Index.