Discover's profit falls after selling UK card business

Discover Financial Services shares were among the top five losers on Wall Street Wednesday.

After announcing profits fell 65 percent, its shares fell 12.6 percent.

However, analysts suggested the correction was due to speculators running up the price of shares by more than 30 percent in the last week-and-a-half.

Mainstream analysts lauded the Riverwoods-based credit card services firm for anticipating the current economic downturn and preparing to weather more hard times ahead.

"They lowered their exposure to the housing boom and bust markets like Phoenix, Las Vegas and Los Angeles," said Michael Kon, senior analyst at Chicago-based Morningstar Inc. "They did this a few years ago when there were no problems in those markets."

Discover's default rates were lower than the industry average, which is around 5 percent, according to industry estimates.

Kon called Wednesday's first-quarter results "a very strong showing."

Nevertheless, shares fell $2.20, to end at $15.20. Discover's 52-week high is $32.17.

Discover said Wednesday its profit fell to $81.2 million after shedding its card business in Britain and preparing for more defaults from U.S. cardholders.

Discover is more than doubling the amount it put aside last year at this time for defaults, a move seen as preparing for a deeper economic downturn.

Excluding the U.K. unit sale, the credit card lender posted a profit of $239 million, or 50 cents per share. That surpassed the average analyst forecast for 40 cents per share, according to Thomson Financial.

Net interest revenue during the quarter rose to $1.30 billion from $1.15 billion a year ago.

Falling U.S. interest rates -- including Tuesday's 0.75 percent interest rate cut by the Federal Reserve Bank -- will eventually improve Discover's margins, according to Chief Financial Officer Roy Guthrie.

"The cost of us doing our business will likely fall," Guthrie said in an interview.

Investment bank Morgan Stanley spun off Discover last June. Discover's debut as a public company arrived just weeks before spiking defaults in subprime mortgages and the ensuing seize-up in the credit markets began causing huge sell-offs in the broader financial sector.