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Who is better positioned to weather the recession (or depression as some people like FT Martin Wolf said), American Express (NYSE: AXP) or Discover Financial Services (NYSE: DFS)? I got some DFS last week so my opinion maybe biased, but wait: I hold Berkshire Hathaway (BRK.B) which in turns holds significant number of AXP shares so I think I am ok here.
Fun aside, I think DFS is better positioned in this downturn because their consumer (like yours truely) continue to use them for daily stuff. On the other hand, American Express, which derives significant amount of revenue from high end consumers and business travel, has experienced and will continue to experience challenges in the near term. It’s about affordability or necessity.
Secondly, Discover Card appears positioned their consumer loan portfolio more conservatively (compared to other card issuers), according to its IR web site. Its exposure to California and Florida (two hard hit areas in real estate market) are smaller compared to others (16% vs. AXP 26%, Investor Presentation 012909). It’s also conservative in terms of credit limit. I have been using their cash for 10 years and I always pay bill on time, but the credit limit is still much lower then other Master Cards I have.
Last but not least, the brand. For me personally I have used its cash rebate credit card for 10 years, and I think it is the best cash rebate card. BTW, I always prefer cash rebate over other airline milage card or bonus points card. As I read more I understand Discover is the leader in cash rebate card.
Also, a little note to clear confusion. Many people compare MasterCard (NYSE: MA) and Visa (NYSE: V) to Discover, this is natural but not comparing apple to apple. MA and V are not card issuers, they derive revenue from transaction service (Chase, BoA, etc. are the card issuers in those cases), Discover dpes both: issue cards and provide transaction service (more revenue from issuing cards or extending credit to consumers). In other words, Discover and American Express carry the credit risk, while MasterCard and Visa don’t. This partially explains the divergence of stock prices of those companies in last few years, amid the credit crunch.