So why is Discover so cheap? One reason is that some analysts and investors believe the company hasn't been able to scale-up its payment processing business sufficiently for it to be a viable contender over the long term. There has even been speculation that the company could be a take-out target for one of the larger tech firms, such as Apple (AAPL), Microsoft (MSFT) and Google (GOOG), looking to boost their payment processing businesses.
But even if Discover were to be acquired, the purchase would likely feature a steep premium. So the take-out scenario is no reason not to consider the stock.
Despite the relatively low current valuation, Discover has outperformed. The shares have returned 4% this year, slightly ahead of the 3% increase for the KBW Bank Index (I:BKX). During 2013, Discover's stock had a total return of 46%, compared to a 35% return for the KBW Bank Index.
This chart shows the stock performance of Discover and State Street against the KBW Bank Index since the end of 2011:
data by YCharts
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