NOVEMBER,3 2009

JOHN KOLB

Discover Financial Services

Summary

Current price 14.1852 week range 4.74 – 17.35 Market cap 7.68BMid cap valueRating

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.

Overview continued

Purchased dinners club from CITI in 2008Expanded their network globallyThis purchase has helped Discover take

market share from Visa, Master Card and American Express

Key Developments

09/10/2009Discover 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 Stock54,054,055 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.

Key Developments

03/23/2009Discover signed a deal with SIX Multipay in

Europe to expand merchant acceptance of Discover’s Dinner Club

03/19/2009Discover announces cut in dividend to $0.02

from $0.06

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

How Revenue is Derived

How Revenue is Derived

Volume by Network

Direct Deposit (Billions)

Cross Sectional Analysis

Valuation Discover (DFS)

American(AXP)

Visa (V) Capital One(COF)

MasterCard (MA)

P/E 5.6 20.5 70.9 N/A 39.2P/B 1.2 3.1 2.8 0.7 11.2P/S 1.1 1.6 15.6 1.3 6P/CF 1.8 10.4 101 3.9 46.1D Yield 0.54 2.19 0.68 0.46 0.26Forward P/E 17.3 18.8 21.55 42.4 17.8Wall St. Rec.Sell (5) Hold (3) Buy (1)

2.4 2.7 1.6 2.6 1.4

Hold/Buy Hold Buy Hold Buy

Time Series Analysis

2006 2007 2008 TTM0

1

2

3

4

5

6

7

8

5.057 5.052

5.669

7.132

1.582

0.945

1.658

2.218

0.42

1.23

2.2

2.77

Revenue (Billions)

Net Income (Billions)

EPS (Diluted)

SWOT Analysis

Strengths#1 rewards program “Consumer Card

Strategies Research Data.”Less loan losses than competitorsStrong relationship with Wal-Mart and

various banks 4,500 banks, credit unions and financial instutions.

Discover Bank

SWOT Analysis

WeaknessesLess acceptance than Visa and MastercardCharge-off rate of 8.39% this is expected to

rise between 8.5% and 9%Weaker brand name than American Express

SWOT Analysis

OpportunitiesSubstantial growth in global marketPositive feedback loop for acceptanceMore spending volume as consumer

confidence increasesMore savings in the near future as consumers

rebuild their accounts

SWOT Analysis

ThreatsLoan loss and charge-offsLower consumer spendingGovernment regulationPending legislation

Valuation

Morningstar Fair Value 27.00Consider buying 13.50My Estimate31.31

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

Valuation

Buy $3,000, 5.5% of portfolio value or 221 sharesBuy 5% of AJG to bring us to market weight

in financials