Capital One Financial Quarterly Stock Valuation

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Benjamin Clark
5.72K Followers

Summary

  • 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.

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.

COF Chart

COF data by YCharts

Defensive Investor - Must pass all 6 of the following tests: Score = 4/6

  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 - FAIL
  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 1/3rd over the last 10 years using 3-year averages at the beginning and end of the period - FAIL
  5. Moderate PEmg (price over normalized earnings) 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 $78.39
MG Value $264.06
MG Opinion Undervalued
Value Based on 3% Growth $99.45
Value Based on 0% Growth $58.30
Market Implied Growth Rate 1.46%
PEmg 11.43
PB Ratio 1.03

Balance Sheet - 6/30/2014

Total Debt $37,084,000,000
Total Assets $298,317,000,000
Intangible Assets $13,977,000,000
Total Liabilities $254,502,000,000
Outstanding Shares 577,600,000

Earnings Per Share

2014 (estimate) $7.39
2013 $6.96
2012 $6.16
2011 $6.80
2010 $6.01
2009 $0.74
2008 -$0.21
2007 $3.97
2006 $7.62
2005 $6.73
2004 $6.21

Earnings Per Share - ModernGraham

2014 (estimate) $6.86
2013 $6.17
2012 $5.15
2011 $4.25
2010 $3.20
2009 $2.45

Dividend History

COF Dividend Chart

COF Dividend data by YCharts

Conclusion:

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.

This article was written by

Benjamin Clark profile picture
5.72K Followers
Benjamin is one of TipRank's top bloggers.  He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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