Discover Financial Services posted a fourth-quarter loss Thursday after writing down its money-losing business in the United Kingdom, and its chief executive said the Riverwoods-based firm could be vulnerable to a takeover if its stock doesn’t rebound.
The nation’s fourth-biggest credit card issuer has lost more than 40 percent of its value since being spun off in June by Morgan Stanley, which analysts said made Discover an “attractive” takeover target.
“It’s one of the reasons that we’d like to see the stock move up. You can become a target if your stock price is too low,” Nelms said. “Our actual performance is strong, so that would suggest we can thrive as an independent company.”
Shares of Discover closed Thursday at $15.46, off 43 cents, on the New York Stock Exchange. It started trading at $26.50 a share in July.
Investors might have been shortsighted in evaluating Discover, Nelms said, adding its share price would eventually match its growth in earnings.
“I’m not sure people have given us enough credit for the 20 years of strong performance before we were public,” he said. “What a lot of people tend to think about is, ‘You’re only two quarters out and the market has just been terrible for a lot of financial-services companies.'”
Discover said it had a net loss of $84 million, or 18 cents a share, compared with a profit of $186.5 million, or 39 cents a share, a year earlier. Excluding the write-down, Discover would have earned 40 cents a share, beating estimates by 4 cents a share. Revenue, net of interest expense, rose to $1.35 billion from $1.21 billion.
Discover has faltered since going public on concern that a weaker economy could hurt consumers’ ability to pay debt, which would cut into the firm’s earnings. Analysts downgraded the company on the prospect of lower-than-expected spending by consumers.
The company wrote down Goldfish Bank Ltd. by $279 million after taxes, or 58 cents a share. The lender was acquired in February 2006 to gain customers in the United Kingdom, the world’s second-largest credit card market.
Income in Discover’s U.S. card business grew 43 percent, to $328 million. Loans climbed 5 percent, to $48.2 billion.
But Discover said “weakening in the U.S. economy” spurred a 29 percent increase in the provision for loan losses, to $584.7 million. The 30-day delinquency rate was 3.59 percent, an increase of 20 basis points from a year earlier. A basis point is 0.01 percent.
“There was a noticeable spike in the delinquency rate, which is a sign of some weakness in the economy,” said Sanjay Sakhrani, analyst at KBW Inc. in New York. “Discover’s credit will deteriorate if we have a recessionary environment, but relative to peers, they’re well-positioned because they haven’t had the loan growth others had.”
This year, industry data show some credit deterioration in the cards segment, but not much beyond what was to be expected after years of better-than-normal conditions. Discover attributed its provision boost to “a trend of more normalized levels of bankruptcy charge-offs compared to the unusually low levels in 2006, and a higher level of loans retained on the company’s balance sheet.”
However, several analysts have said mortgage credit problems are starting to spill into credit cards. In 2008, homeowners’ inability to pay their mortgages and get home-equity loans could significantly boost delinquency and charge-off rates in card payments.
In the international card unit, a pretax loss widened to $423 million from $50 million a year earlier because of the Goldfish write-down, which was $391 million before taxes.
Discover’s net income was $561 million, down from $1.08 billion in 2006. Excluding the Goldfish charge, net income for this year came to $840 million.
