(COF) (Capital One Financial)
Overview of the Company - Capital One Financial is a financial services company that has three main sectors - Credit Card, Consumer Banking, and Commercial Banking. It has a $74 billion dollar market cap, and like with most financial companies, their core business model revolves around net interest margin. This is the difference between the rates that they pay out and interest and the rates that they receive by charging interest on loans.
Fundamental Analysis - Capital one is a very cheap stock right now and as a financial service company, it has been benefiting from the high liquidity in the system, and will continue to benefit as interest rates go up and their net interest margin increases.
How (COF) Stacks Up to Competitors - Capital One has the 2nd worst profit margins of the group consisting of Discover Financial(DFS), Mastercard, (MA), and American Express(AXP) Mastercard and Discover Financial have the best profit margins and return on equity by a significant margin of the group. Even though their profitability may not be there, COF has the highest revenue and earnings per share, even though they have the second lowest stock price. This means that while the other competitors trade at multiple times book value, COF barely trades over book value. Additionally they do not have much debt like the other competitors, they almost have a 1-1 cash to debt ratio. Combine that with the second highest dividend rate in the group and Capital One looks pretty attractive. Truth be told, the group as a whole looks incredibly attractive right now. With both COF and DFS beating on the least four earnings and AXP and MA only missing on one in the last four, this group is on fire, but I still think there is value and money to be made here in certain names.
Bull Case - Capital One will keep hitting earnings and posting beats with the help of rising interest rates and an economy of consumers that wants to be spending lots of money using Capital One credit cards. As Capital One continues to trade at a steep discount, there will come a time where the street will realize the consistent earnings power this company has and will be inclined to buy at such cheap valuations in comparison to the group and the market, pushing the stock price even higher.
Bear Case - Capital One will slow down on earnings. We will likely see a pause in the interest rates and the economy as prices continue to go up and consumers are less inclined to spend. Capital One trades at discount to the group for a reason, as most of its growth has already been priced in and there isn't much new to the story to surprise investors. Capital One is a slow growing company that deserves to be trading at a small multiple.
Valuation and My Price Target - I believe that COF can test the mid $170’s in the short term and will eventually trade at 8 times earnings. I believe that rising profits and EPS numbers can push this stock higher and investors will realize that Capital One does have the room to grow. By increasing EPS numbers to $29 a share or $7.25 a quarter (which is actually modest as COF has achieved almost $8 EPS the past two quarters) and its P/E ratio to 8, COF will be trading at around $232. A P/E ratio of 8 will still be the lowest in the group increasing EPS numbers sto $29 is certainly plausible as COF is on pace to achieve this in the next year.
The Verdict BUY HOLD SELL
In a rising interest rate environment and the strength of the American economy as consumers want to spend, COf is poised to make huge EPS gains. With this, they will attract more investors allowing the stock price to surge to about $232 in one year. This means that by my predictions, COF will have a one year return of over 39%, which indicates that right now it is certainly a BUY.
*all data provided by yahoo finance and nasdaq.com