ModernGraham Quarterly Valuation Of Capital One Financial

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 |  About: Capital One Financial Corporation (COF), Includes: FAS, FAZ, UYG, XLF
by: Benjamin Clark

In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period. Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn't be considered when evaluating the company's prospects, but doing so would involve speculation. We don't know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment. In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Capital One (NYSE:COF) fares in the ModernGraham valuation model.

COF Chart

COF data by YCharts

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

Key Data:

Recent Price $74.01
MG Value $252.41
MG Opinion Undervalued
Value Based on 3% Growth $95.06
Value Based on 0% Growth $55.73
Market Implied Growth Rate 1.39%
PEmg 11.29
PB Ratio 1.02
Click to enlarge

Balance Sheet - 12/31/2013

Total Debt $39,739,000,000
Total Assets $297,048,000,000
Intangible Assets $15,827,000,000
Total Liabilities $255,304,000,000
Outstanding Shares 572,680,000
Click to enlarge

Earnings Per Share

2013 $7.35
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
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Earnings Per Share - ModernGraham

2013 $6.56
2012 $5.53
2011 $4.78
2010 $3.90
2009 $3.14
2008 $4.63
Click to enlarge

Dividend History

COF Dividend Chart

COF Dividend data by YCharts

Conclusion:

Capital One Financial is a great company for Enterprising Investors to look at in more detail, but it does not quite qualify for the Defensive Investor because it has not shown sufficient growth in its earnings over the ten-year historical period. That said, the company passes all of the requirements of the Enterprising Investor. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel very comfortable proceeding with further research into the company and comparing it to competitors. From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $3.14 in 2009 to $6.56 for 2013. This solid level of demonstrated growth surpasses the market's implied estimate of 1.39% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

Disclaimer: The author did not hold a position in Capital One Financial (COF) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.