Capital One Financial (NYSE:COF) is a very solid opportunity for Enterprising Investors following the ModernGraham approach. The company has done well in Mr. Market's eyes over the last several years, and many who claim to be value investors will turn away as a result. But true value investors know that Mr. Market's behavior should not impact the investor's opinion about whether the company is undervalued. Rather, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how Capital One Financial fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation, in order to remove the subjective elements of emotion. This is best achieved 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.
Defensive Investor - Must pass all 6 of the following tests: Score = 4/6
Enterprising Investor - Must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
|Value Based on 3% Growth||$99.45|
|Value Based on 0% Growth||$58.30|
|Market Implied Growth Rate||1.46%|
Balance Sheet - 6/30/2014
Earnings Per Share
Earnings Per Share - ModernGraham
Defensive Investors, the most conservative level of ModernGraham style investing, may not be interested in Capital One Financial due to the unstable earnings and low earnings growth over the last ten years, but Enterprising Investors should be very interested. The company passes all of the investor types' requirements, and they should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
In recent years, the company has grown its EPSmg (normalized earnings) from $3.20 in 2010 to an estimated $6.86 for 2014. This is an outstanding level of growth, which significantly outpaces the market's implied estimate of only 1.46%. In fact, the actual growth demonstrated by the company is greater than twenty percent. As a result of the strong growth demonstrated historically, the ModernGraham valuation model returns an estimate of intrinsic value well above the price, supporting a clear conclusion that the company is significantly undervalued. Enterprising Investors are therefore encouraged to proceed with further research to determine whether Capital One Financial is suitable for their own individual portfolios.
Be sure to check out previous ModernGraham valuations of Capital One Financial for better perspective.
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