I'm not the biggest fan of Discover Financial Services (NYSE: DFS), the credit-card company that competes with MasterCard (NYSE: MA), Visa, Inc. (NYSE: V), and American Express (NYSE: AXP). I currently like Visa the best. Why? I like the brand, I like the fact that it doesn't have direct exposure to loans, and I think there's a lot of upside left to its stock price on a long-term basis (granted, the stock hasn't been strong lately). Nevertheless, I have to wonder if there might be trade potential with Discover's stock.

It's not so much the Q4 earnings. Net income from continuing operations more than doubled to $0.92 per share, something that looks great on the surface. It was helped along, however, by settlement proceeds relating to antitrust complaints against Visa and MasterCard. Not only that, but when you take a look at the consumer-confidence landscape, you'll see that it's pretty dreadful. It doesn't take too much thinking to realize that spending will be down and bad loans most likely will be up going forward. This doesn't benefit Discover. But, according to this article, government help does. Management wants access to some of the monies available in the now-famous federal rescue package. Bank-holding status, if Discover gets it, will do the trick.

This is why I see some trade potential with the stock. It rose the other day on the news, and as I am writing this now, the stock is up another 3%. If one was to play around with Discover, one should only do so temporarily, in my opinion. I think, on a longer-term basis, that either Visa or MasterCard are much better options for investing in the eventual consumer rebound (whenever that decides to happen, of course). Again, all you have to do is remember that Discover has more on the line in terms of charge-offs and loan provisions. Yes, the government can help out Discover's situation, and that will be valuable, but I still wouldn't want the company as a core member of my portfolio.

Disclosure: I don't own any company mentioned; positions can change at any time.

Credit-card concerns Visa, Inc. (NYSE: V) and MasterCard, Inc. (NYSE: MA) will be shelling out up to $2.75 billion to settle an antitrust suit with Discover Financial Services (NYSE: DFS). Specifically, MasterCard will pay Discover $862.5 million in the fourth quarter, while Visa will fork over $1.89 billion over the course of 2009. Following the release of the settlement's details, an analyst at Keefe, Bruyette & Woods is weighing in favorably on all three firms.

Sanjay Sakhrani called the news "a big win for Discover, as it provides an additional cushion to contend with the implications of a weaker U.S. economy." He expects the payments will add about $1.75 to Discover's earnings per share. However, he also cited the report as an upside catalyst for MasterCard and Visa, as it eliminates an overhang on shares of both companies -- an assertion supported by analyst Julio C. Quinteros, Jr., of Goldman Sachs.

Unfortunately, though, it's not all sunshine and rainbows in the credit-card group today. Morgan Stanley (NYSE: MS) has filed its own suit against Discover in New York State Supreme Court, alleging that it's entitled to a chunk of the $2.75-billion settlement. DFS was spun off from Morgan Stanley last year, and the latter company claims that it should receive a portion of the award under the terms of a special dividend agreement.

Not so fast, says Discover, which alleges that its parent company is in violation of their spinoff agreement, and "the amount of Morgan Stanley's special dividend is a matter of dispute." Morgan fired back that "there is absolutely no basis for Discover's claim that the agreement was breached." Stay tuned to see how this credit-card drama plays out -- in early trading, shares of all three credit card companies were higher.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Can't say I'm a huge fan of Discover Financial Services (NYSE: DFS). Nothing against the company, of course, but when it comes to credit-card stocks, I'd much rather be aligned with either Visa (NYSE: V) or MasterCard (NYSE: MA). They make money on transactions at the register and don't have exposure to loans. With that bias fully disclosed, let me check out Discover's third quarter results, which the company discussed earlier in the week.

There really wasn't anything in the earnings release that made me want to buy the stock. Net revenues increased 8%, but earnings per share from continuing operations plummeted 27% to $0.37. Nevertheless, that was enough to beat analyst expectations by two pennies. The rough economy is hurting Discover. Charge-offs and reserves against them are negatively affecting the company.

Yet, there is an interesting litigation wrinkle to the Discover story as it relates to Visa and MasterCard. According to Bloomberg, some Wall Street experts believe that Discover may, at some point, settle its ongoing battle with the two card companies for $4 billion. It's a complicated situation, one centering on anti-competitive complaints. In the past, the major credit-card issuers wanted banks to deal with their cards only, effectively shutting out competitive forces. If a settlement isn't reached, then Visa and MasterCard may have to pony up billions more, since damages apparently could be tripled in this case if those two entities were to lose in court. That type of litigation news does represent a risk for those major card companies. Discover, no matter what, looks to be collecting a ton of dough at some point (it will have to share some of the windfall, Bloomberg says, with Morgan Stanley (NYSE: MS), which Discover was spun off from).

It's been about a year since Discover Financial Services (NYSE: DFS) became a public company. Unfortunately, the stock performance has been miserable -- going from $31 to $13.57.

Yet, the company keeps making money. In the latest quarter, Discover posted net income of $234 million, or $0.48 per share, which compares to $209.2 million, or $0.44 per share in the same period a year ago. The company got a boost from its unloading of its Goldfish card division (a UK credit card company).

No doubt, Discover must deal with the slowing U.S. economy. But, the good news is that the company has been relatively conservative with its credit standards and has long-time customers (which helps provide more stability). However, there is still a rise in delinquencies and charge-offs. For example, overdue loans (for the past 30 days) has gone from 2.71% to 3.54% over the past year.

Now, Discover does have key asset advantage; that is, it operates its own processing network. This is certainly a solid business as people increasing use credit cards and other electronic payments. In fact, Discover recently purchased Diner's Club International, which also has its own processing network.

Unfortunately, Wall Street isn't interested. The belief is that -- as the economy remains sluggish -- there is likely to be a drag on the growth of Discover.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

As seen with the Visa (NYSE: V) IPO this week, there's definitely interest in the credit card industry.

However, not all companies are benefiting. For example, take a look at Discover Financial Services (NYSE: DFS), which became a public company in June. Since then, the stock has gone from $32 to $15.20.

Well, this week Discover announced its fiscal Q1 results. With the weak economy, it's no surprise that the company is feeling the pain and earnings plunged 65% to $81.2 million, or $0.17 per share.

While a chunk of this came from the unloading of its UK division (called Goldfish), the good news is that the transaction should help free up capital and provide more focus. This will certainly be critical in dealing with the inevitable charge-offs and delinquencies. Keep in mind that Discover set aside $305.6 million for credit losses.

Yet, investors are still showing caution. In yesterday's trading, Discover's stock fell 12%.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.