Discover Financial Services (DFS), mcap=$25500m

DFS / SYF pair trade:
– Pair trade on credit card issuers – long DFS short SYF
– Both stocks trade at similar 7-8x earnings multiple despite SYF being a worse business with a worse track record.
– DFS is better positioned for a recessionary environment
– DFS is 85% prime vs 76% for SYF.
– Discover also has a lot of excess capital and has only recently restarted its buyback.
– SYF has already distributed most of its excess capital.
– SYF is also much more exposed to the likely cut in late fees (as pressured by Consumer Financial Protection Bureau) with an impact possibly in the order of 30-60% of EPS.
– This compares to the expected EPS impact of only 5-10% for DFS.

DFS valuation:
– SYF trades at 7.3x 2023 PE and DFS at 8.2x.
– 30% upside on DFS long and 30%+ downside on SYF.

Exp. gain: 60%

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