ModernGraham Valuation: Capital One Financial

Jan.12.14 | About: Capital One (COF)

Here is a look at how Capital One Financial (NYSE:COF) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  3. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  4. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  5. Moderate PEmg ratio - PEmg is less than 20 - PASS
  6. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability - positive earnings per share for at least 5 years - PASS
  2. Dividend Record - currently pays a dividend - PASS
  3. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $244.83
MG Opinion Undervalued
Value Based on 3% Growth $92.21
Value Based on 0% Growth $54.05
Market Implied Growth Rate 1.88%
PEmg 12.27
PB Ratio 1.09
Click to enlarge

Balance Sheet - 9/30/2013

Total Debt $30,159,000,000
Total Assets $289,888,000,000
Intangible Assets $13,906,000,000
Total Liabilities $248,138,000,000
Outstanding Shares 581,940,000
Click to enlarge

Earnings Per Share

2013 (estimate) $6.76
2012 $6.54
2011 $7.03
2010 $6.68
2009 $0.98
2008 $0.14
2007 $6.55
2006 $7.62
2005 $6.73
2004 $6.21
2003 $4.92
Click to enlarge

Earnings Per Share - ModernGraham

2013 (estimate) $6.36
2012 $5.53
2011 $4.78
2010 $3.90
2009 $3.14
2008 $4.63
Click to enlarge


Capital One Financial is a company that stands out from its peers, having survived the financial meltdown without posting a negative earnings year. This company is not suitable for the Defensive Investor, due to not sufficiently growing earnings over the ten year period, but it is suitable for the Enterprising Investor. Capital One appears to have solid earnings stability, a strong dividend history, and is trading at low PEmg and PB ratios. Value investors seeking to follow Benjamin Graham's methods for the Enterprising Investor should feel very comfortable proceeding with further research, beginning with a review of ModernGraham's Valuation of American Express (NYSE:AXP).

In terms of a valuation, the company has grown EPSmg (normalized earnings) from $3.14 in 2009 to an estimated $6.36 in 2013. This is solid growth that more than supports the market's implied estimate for growth of 1.88%, indicating the company may be undervalued presently.

What do you think? Do you agree that Capital One Financial is undervalued? What would be your assessment? Is the company suitable only for Enterprising Investors?

Disclosure: The author did not hold a position in Capital One Financial (COF) at the time of publication and had no intention of changing that position within the next 72 hours.