- Many investors define volatility as risk; I define it as opportunity.
- Shares have sold off by 6% since the beginning of January, on no apparent news.
- The current environment is favorable for Capital One; shares are undervalued and warrants even more so.
Capital One's Latest Deal With Hudson Improves Prospects For Top Line GrowthMaria Zahid • Dec. 12, 2014
- Capital One Financial Corporation has managed to ink a deal with Hudson’s Bay Company for a credit card program making it the exclusive credit card issuer for Hudson.
- By the end of the third quarter, the global credit card portfolio of the company was worth nearly $80.6 billion.
- In 2012, Capital One signed a $31.3 billion acquisition of HSBC's U.S. credit card business. The company also signed a deal worth $9 billion with ING Direct USA.
- The company continues to showcase good management of expenses. Operating expenses have been steadily declining over the past few quarters.
- With the economic environment improving in the U.S., credit card business is likely to improve, resulting in improvements in top line growth.
- Capital One Financial has issued a new Series D preferred stock.
- Relative to its existing Series C and P preferreds, it is attractive at 6.70%.
- The issue is also attractive relative to peers, many of whom investors are exposed to elsewhere.
- COF is suitable for the Enterprising Investor but not the Defensive Investor, following the ModernGraham approach.
- According to the ModernGraham valuation model, the company is significantly undervalued at the present time.
- The market is implying 1.46% earnings growth over the next 7-10 years, well below the company's actual growth in recent years.
- Analysts are concerned about the potential for higher credit losses, but this is not unexpected and must be viewed in context.
- The company is receiving no credit for its pedigree in utilizing technology and analytics to establish leadership positions in new market segments.
- Capital One's valuation is still undemanding; the TARP warrants offer a leveraged play.
- First, we'll review the terms of the warrants, including strike price, expiration date, and adjustment terms.
- Next we'll attempt to assign a reasonable forward valuation of Capitol One common stock through 2018.
- Lastly, we'll compare the returns of the warrants relative to the returns of the common stock.
Capital One Is Cheap, But Earnings Growth Is Uncertain
- While I like COF's overall strategy, macroeconomic challenges are holding back the stock and this looks likely to continue.
- The company's focus on consumers in its loan book makes it less exposed to the gradual upward turn in business borrowing that seems to be taking place.
- Credit quality at COF is very good and valuation is reasonable, but until the firm starts showing definite signs of significant revenue growth, the stock may be stuck in neutral.
Capital One Is Paying You 6.4% With Its Newest Issue
- Income investors can receive a very nice income stream from Capital One's newest issue.
- With the stock market yielding around 2%, this issue triples the market.
- Capital One is a very strong, stable issuer, making this attractive.
ModernGraham Quarterly Valuation Of Capital One Financial
Whisper Number Impact: Earnings Preview For Capital OneWhisperNumber • Apr. 18, 2013
Forget Your Wallet - Capital One Belongs In Your Portfolio
Capital One Shares Look Cheap After Post-Earnings Sell-Off
Whisper Number Impact: Earnings Preview For Capital OneWhisperNumber • Jan. 17, 2013
Sat, Jan. 24, 4:48 PM
- The financial sector is off to a worse start to the year than even the energy names, with the XLF down 3.9% YTD vs. the XLE's 3.2% decline. The S&P 500 is roughly flat. The SPDR KBW Bank ETF (NYSEARCA:KBE) is off 7.5%, and the Regional Bank ETF (NYSEARCA:KRE) is lower by 6.9%.
- Q4 earnings results haven't been wonderful, but financial names had been savaged well before those reports started coming out. Instead there's a difficult regulatory regime that won't quit, and - for now - it's looking like "wait'll next year" for the rising interest rates that were supposed to drive profit margins higher. The 10-year/2-year spread - already pretty low at 150 basis points to start the year - has narrowed to 137 bps.
- A partial roll call of banks: Bank of America (NYSE:BAC) -12.1% YTD, Citigroup (NYSE:C) -10.1%, JPMorgan (NYSE:JPM) -9.4%, Morgan Stanley (NYSE:MS) -9.4%, Regions Financial (NYSE:RF) -14.7%, KeyCorp (NYSE:KEY) -4.5%, PNC Financial (NYSE:PNC) -5.4%, Bank of New York (NYSE:BK) -9.1%, Capital One (NYSE:COF) -6%, Discover (NYSE:DFS) -13.6%.
- Other spread-starved sector names: MetLife (NYSE:MET) -9.8%, AIG (NYSE:AIG) -8%, Prudential (NYSE:PRU) -10.8%, Schwab (NYSE:SCHW) -9.9%.
- Some of what's working in financials: Blackstone (NYSE:BX) +6.7%, E*Trade (NASDAQ:ETFC) +1.2%, WisdomTree (NASDAQ:WETF) +12.3%, Legg Mason +2.8%.
Thu, Jan. 22, 4:19 PM
- Q4 net income of $999M or $1.73 per share vs. $852M and $1.43 one year ago.
- Net interest income of $4.656B up 5% Y/Y, with NUM of 6.81% up eight basis points. Domestic Card period-ending loans up 6% to $77.7B. Commercial Banking loans up 2% to $50.9B. Consumer Banking loans up 1% to $71.4B, with auto loans up 4% to $37.8B, home loans down 4% to $30B thanks to run-off of acquired portfolios.
- Noninterest income of $1.157B up 3% Y/Y.
- Noninterest expense of $3.284B up 2% Y/Y, with marketing expense of $509M up 19%.
- Tangible book value per share of $50.32 up 15% from a year ago.
- Conference call at 5 ET
- Previously: Capital One Financial misses by $0.01, beats on revenue (Jan. 22)
- COF -0.9% after hours
Thu, Jan. 22, 4:08 PM| Comment!
Wed, Jan. 21, 5:35 PM
Mon, Jan. 5, 1:25 PM
- "We view Wells Fargo (WFC -2.7%) as a core bank holding, but shares have reached our price target and we believe sentiment is now overwhelmingly positive after leading returns in 2014 (+21%, #1 among the top 50 banks)," says Baird's David George, who earlier downgraded the stock from Outperform to Neutral.
- Put the money in another bank? Not so quick, says George, suggesting the Fed could tighten later and be less aggressive than most expect, disappointing those hoping for higher rates to boost profits. Other than Wells Fargo, George sees sentiment highest in PNC Financial (PNC -2.7%), SunTrust (STI -3.9%), and U.S. Bancorp (USB -2.2%).
- Asset-sensitive names like Comerica (CMA -3.7%) and Zions (ZION -3.4%) lagged in 2014, but estimates still look to high.
- Top ideas would be Fifth Third (FITB -2.7%), Capital One (COF -2.4%), and JPMorgan (JPM -3%), but George is having a tough time finding value in the sector.
- Previously: Longtime Wells Fargo bull rings the register (Jan. 5)
Dec. 4, 2014, 8:38 AM| Comment!
Nov. 25, 2014, 4:47 PM
- Auto loan originations were $105B in Q3, according to the New York Fed's Household Debt and Credit report, with auto loan balances - now at $934B - up for the 14th consecutive quarter.
- The 90-day delinquency rate of 3.1% fell 20 basis points from Q2.
- Among those watching with interest are sizable auto lenders like Capital One (NYSE:COF), Santander Consumer (NYSE:SC), and Ally Financial (NYSE:ALLY).
Nov. 13, 2014, 9:49 AM
- Capital One (COF +0.8%) in an outlier to the upside in the credit card names in early action after Deutsche Bank initiates coverage on the stock with a Buy and $92 price target. American Express (AXP -0.2%) is started at Hold.
- Deutsche cuts Discover FInancial (DFS -0.4%) to Hold from Buy, citing valuation and high expectations for loan growth which the company could find tough to meet. CapOne, says Deutsche, offers a better risk/reward.
Nov. 11, 2014, 10:34 AM
- "It's difficult for us to see how Capital One (NYSE:COF) can grow EPS in 2016 based on the net charge-off rate trajectory that it has laid out," say Nomura's Bill Carache, downgrading to Neutral from Buy, and cutting the price target to $86 from $94. "Our analysis leads us to conclude that the tailwind from accelerating loan growth that COF is experiencing is not enough to offset the headwind associated with taking its NCO rate from ~2.8% in Q3 to a steady state of 3.5%."
- Capital One is an outlier to the downside among the credit card names in today's session, lower by 1.15%.
Nov. 4, 2014, 12:34 PM
- Capital One (COF -0.4%) joins Santander Consumer, Ally Financial, and GM Financial in being investigated over subprime auto lending practices, disclosing - in its 10-Q - the receipt of a subpoena from the New York DA's office.
- Overall, Capital One is the country's 3rd-largest auto lender - behind Wells Fargo and Ally - but in the subprime-heavy used car loan market, Cap One is 2nd only to Wells Fargo.
- "When you think about the economics of the (auto finance) business, subprime has high margins and higher losses," said Capital One CEO Richard Fairbank on this month's earnings call. "This is not for the faint of heart."
Oct. 30, 2014, 2:10 PM
Oct. 17, 2014, 11:53 AM
- "Is this finally the turn in credit," asks William Blair's Robert Napoli, noting Capital One (COF -3.3%) management expects (CC transcript) credit losses to move to the high 3% range over the next year from the high 2% range today. Given loan growth acceleration and flattening delinquencies, it could be, says Napoli, answering his own question.
- Also of concern is incremental competitive stress in the consumer and commercial segments, not to mention auto finance, where returns are still attractive, but declining.
- In commercial, the revenue yield has dropped about 50 bps in a year, but the cost of funds is down just 3 bps, and management seemed most concerned with this, says Napoli.
- He reiterates his Market Perform rating.
- RBC Capital - reiterating its Outperform rating - cuts the price target to $86 from $88.
- Previously: Capital One Financial misses by $0.08, beats on revenue
Oct. 16, 2014, 4:18 PM
- Q3 net income of $1.1B or $1.86 per share vs. $1.1B and $1.84 one year ago. Shares outstanding of 558.5M falls from 582M amid $2.5B buyback plan.
- Net interest income of $4.497B vs. $4.560 a year ago, with net interest margin of 6.69% up 14 basis points. Domestic card loans of $73.1B up 3%. Commercial banking loans of $49.8B up 3%. Auto loans of $36.3B up 4%. Home loans of $31.2B down 4% thanks to run-off.
- Noninterest income of $1.142B vs. $1.091B.
- Provision for credit losses of $993M vs. $849M.
- Noninterest expense of $2.985B vs. $3.109B, with marketing spend of $392M vs. $299M.
- Earnings call at 5 ET
- Previously: Capital One Financial misses by $0.08, beats on revenue
- COF -1.6% AH
Oct. 16, 2014, 4:10 PM| Comment!
Oct. 15, 2014, 5:35 PM
Oct. 13, 2014, 8:00 AM
- When you're a hammer, everything looks like a nail. In what smells like another foray by the Consumer Financial Protection Bureau, with other agencies possibly joining in, banks are reportedly under investigation for lending ... this time for automobiles.
- Amid an otherwise sluggish loan market - especially for mortgages - auto lending has experienced rapid growth over the past few years, particularly subprime lending, and those in that business - Santander Consumer being one - are already under examination by the CFPB.
- At issue for banks is not just the direct auto loans they're making, but the financing they're providing to shops like Santander Consumer.
- Wells Fargo (NYSE:WFC) is the largest U.S. auto lender, with $50.8B in loans outstanding at the end of last year, roughly $15B of which was subprime. In addition, the bank has extended since 2011 more than $1.5B of credit lines to the country's largest subprime lenders. Other sizable players include Capital One (NYSE:COF) and JPMorgan (NYSE:JPM).
- "Banks are making a lot of money off these (auto) loans in many different ways," says the head of a consumer advocate group. Isn't that what they're supposed to do?
- "The subprime auto sector appears too small to present a systemic risk," says BAML's Michael Hanson.
- ETFs: XLF, FAS, FAZ, UYG, KRE, VFH, KBE, IYF, IAT, SEF, IYG, FXO, FNCL, KBWB, RKH, QABA, FINU, KRU, KBWR, RWW, RYF, KRS, FINZ
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