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Capital One Financial (COF) - One Financial Stock Gurus Are Paying Attention To

December 16, 2011 | About:
Federico Flom

Federico Flom

6 followers
Capital One Financial (COF) is a diversified financial institution. It is one of the largest issuers of Visa (V) and MasterCard (MA) credit cards in the U.S., and it is one of the largest depositary institutions in the U.S. The firm has an auto finance segment and a global financial services segment, which includes foreign credit cards and other lending such as small-business loans.

The bank reported net income of $813 million, or $1.77 per common diluted share. The firm has been able to increase revenue despite high unemployment in the United States and a slow economic recovery.

One of the most important news is that the firm has been able to increase its loans and loan commitments, particularly on the commercial side. Total loans rose 3% from the year before and commercial loans have seen an 8% increase.

“Beyond loan growth, there are continuing signs of traction in our Domestic Card business. New account originations continue to grow, and new accounts booked in the third quarter of 2011 were more than double the new accounts booked in the third quarter a year ago. Growth in purchase volume continues to outpace the industry. Our purchase volume grew 17% from the third quarter of 2010, excluding the impact of the Kohl's portfolio.” said Richard Fairbank, founder and CEO.

Ten years ago, Capital One was a business that only offered credit cards to individuals in the U.S. Its main source of revenue came from interchange fees, interest charges and securitization income.

However, Capital One has been able to grow and now this business is only a segment of the company. The change has been driven by several acquisitions that enabled Capital One to operate alongside a collection of good businesses.

More than 70% of the profits come from the consumer lending segment, which includes the legacy of U.S. credit card business, auto finance, and credit card businesses in the United Kingdom and Canada.

Capital One as a brand is well recognized in financial services. This recognition has been driven by its national scale, its strong brand and ingenious campaigning in marketing. Moreover, its national scale enables Capital One to obtain valuable information about consumer spending trends. The access to these data allows the firm to make better decisions as regards selling initiatives, new product introductions, pricing strategies, and market opportunities and risks.

The remainder of the profits comes from the banking segment, which consists of two banking franchises in New York and Louisiana. Each of them operates in different markets and is targeted at different types of clients. Nevertheless, they are both known for being solid underwriters and for performing operations with solid growth opportunities.

Capital One bought ING Direct in an effort to boost its presence in the online banking space. However, analysts consider that this acquisition will not bring high return.

COF depends on the securitization market to fund credit card and vehicle loans. Without funding alternatives, profits from these businesses might come under pressure, and in the worst case, the firm might face liquidity problems.

The company also faces regulatory risk. New rules that govern fees paid by merchants might negatively impact the firm's revenue.

Last quarter results

Net income from continuing operations was $865 million. This represents a fall of 8.5% from $945 million in the prior quarter but a 5.7% increase from $818 million in the year-ago quarter.

Net income came in $1.77 per share compared to $1.97 in the previous quarter and $1.76 per share in the year-ago quarter.

Total revenue for the reported quarter stood at $4.15 billion, up 4.0% sequentially and 3.4% year over year. It was mainly driven by higher net interest income.

Net interest income rose 4.7% sequentially and 5.6% year over year to $3.28 billion.

Similarly, non-interest income also rose 1.6% sequentially but fell 4.0% year over year to $871 million.

Capital One is well reserved and well capitalized.

Valuation

The fair value estimate is $70 per share. Capital One´s earnings power was obscured by high credit costs during the past two years.

Earnings are likely to rebound to more normalized levels. It is forecast that total assets will increase by less than 4% annually during the next five years and the net charge-offs/loans ratio in the credit card business will drop to 6.5% in 2011, 5.5% in 2012, and average 5% in the long run.

The efficiency ratio is expected to average 48% during the next five years.

We expect the strong earnings and deep access to deposits will maintain the strength of our capital and our liquidity. Coupled with our rigorous approach to risk management, we expect our balance sheet strength will sustain our proven financial resilience and our ability to deliver shareholder value through economic cycles,the CEO added.

I really like the quality of COF's management. Richard Fairbank has been CEO since 1994. He is a visionary who wishes to take risks for the sake of protecting the long-term value of the Capital One franchise. Fairbank has an excellent record and he's doing a good job running Capital One for the benefit of shareholders.

Fairbank's decision to diversify the legacy credit card business by buying regional banks is a smart move that's now paying off as the firm benefits from a relatively diversified balance sheet, sufficient liquidity, and more stable funding than in the past.

Capital One is owned by superb investors such as John Paulson and Andreas Halvorsen. Lots of managers got interested in this stock at the current levels. It also call my attention that the shares show an excellent relative strenght over the rest of the financial sector, which was heavily punished since the start of the year. It seems that there are some reasons in COF that make the stock generate a too much better performance over other banks, such as JPM, C and BAC.

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Rating: 3.5/5 (15 votes)

Comments

vgm
Vgm - 2 years ago
I agree with your thesis about COF.

Just to add that Bill Nygren was on Bloomberg a couple of days ago and highlighted COF as one of his holdings which was suffering alongside other financials, and which is currently very attractively priced.

http://www.bloomberg.com/video/82795784/

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