Discover Financial Services (ticker: DFS) experienced a significant decline in stock value following an unexpected leadership shift and a downgrade by an analyst. The company announced Chief Executive Roger Hochschild's departure as both CEO and board member on Monday. However, Hochschild will remain in an advisory capacity until the end of the year to facilitate a smooth transition.
RBC Capital Markets analyst Jon Arfstrom expressed surprise at the news and noted that Discover had not previously communicated any plans for CEO succession to investors. Arfstrom predicts that the sudden resignation of the long-tenured leader will likely result in a short-term downturn for the company's shares.
Board Chair Tom Maheras acknowledged the decision, stating that the board and Hochschild mutually agreed that the timing was appropriate for a leadership transition. The statement also highlighted the board's commitment to maximizing Discover's potential by focusing on compliance, risk management, and corporate governance.
As a consequence of these developments, Discover's shares plummeted by 10% to $92.16 on Tuesday, reaching their lowest closing price since October 2022. Dow Jones Market Data reported that the stock was the poorest performer in the S&P 500 on that day and has declined by 5.8% throughout 2023.
Leadership Transition at Discover
Discover recently made an announcement regarding their leadership transition. The company revealed that starting from around 2007, they had mistakenly categorized certain credit-card accounts in a way that increased costs for merchants while not affecting cardholders.
While it remains unclear if this leadership change is connected to any regulatory issues, industry experts anticipate that investors will question whether the recently disclosed merchant pricing problems or last year's student loan servicing issues played a role in this CEO transition. Analyst Arfstrom, who rates the stock as Outperform with a price target of $130, shared these concerns.
In July 2022, Discover temporarily halted its share repurchase program due to an internal investigation into their student loan servicing practices and related compliance matters.
Analyzing the situation, Evercore ISI analyst John Pancari rates Discover's stock as In Line and has set a price target of $90. Pancari went on to include Discover in Evercore's Tactical Underperform list, citing persistent regulatory risk, management uncertainty, and potential negative implications for returns in a research note.
It is worth noting that other credit card companies, such as American Express (AXP), Visa (V), and Mastercard (MA), also experienced declines in their stock prices on the same day. American Express dropped 2.3%, Visa fell by 1%, and Mastercard declined by 0.9%.
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