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Jonathan Poland
Jonathan Poland
Articles (477)  | Author's Website |

Capital One Financial Is Worth Double

Compared to similar financial services companies, the company is nowhere near its fair value

November 21, 2018 | About:

Capital One Financial Corp. (NYSE:COF) is looking to change how banking is done at the retail level with its new cafes and no-fee checking, and the company continues to push hard into credit cards.

November has been an eventful month for the company. At the beginning of the month, Capital One completed the sale of 1 million retail brokerage accounts to E*Trade (NASDAQ:ETFC) for roughly $109 each. These accounts carried $15.4 billion in total customer assets, including $1.6 billion in cash. This follows the company's offloading of mortgage loan portfolio in the second quarter. Last week, the company reported October credit card delinquency rates were up to 3.99% versus 3.80% in September, with net charge-off rates also higher at 4.25% versus 4.13% in September.

That said, the company remains on track to earn over $11 a share this year and upwards of $12 per share next year with growth expected to continue beyond 2020.

Founder and CEO Richard Fairbank has provided instrumental leadership, driving the bank's impressive growth over the last decade. The company specializes in three businesses: credit cards (42% of loans), consumer lending (30% of loans) and commercial banking (28% of loans). Credit cards still account for north of 60% of the company's income.

The hardest risk to quantify is subprime lending, which is an aspect the bank is known for. If the overall economy (not just the market) starts to turn downward, Capital One's credit delinquencies will rise significantly. That's why the banking cafes could be a big win. Lower tax rates helped support the bottom line in the short run, but long term, the Capital One Cafe will help the bank differentiate against competition.

More importantly, Capital One looks highly undervalued when compared to other credit service providers like American Express (NYSE:AXP) or regional banks like PNC Financial (NYSE:PNC). PNC, a great bank in its own right, trades at 1.3 times book and 3.7 times sales, while Capital One is priced at 0.8 times book and just 1.5 times sales.

American Express has very similar financial results with sales and net profit roughly the same as Capital One; however, it also gets a lot more respect from the market with higher price-earnings, price-book and price-sales multiples. In fact, if Capital One priced at the same level as American Express, the share price would be well above $200. I think it's only a matter of time before that happens - a $41 billion market capitalization is nowhere close to the company's fair value.

The company signed a credit card program agreement with Walmart (NYSE:WMT) in July. Capital One is set to become the exclusive issuer of the large discount retailer's private-label co-branded credit card program in the U.S. This long-term agreement will begin on Aug. 1, 2019 and, with Walmart's renewed force in retail, the sky is the limit for Capital One.

Disclosure: I am not long or short any stocks mentioned in this article.

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About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

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