Capital One – Consumer Spending Trends Could Lift Stock Value

Capital One (NYSE:COF) is one of the largest banks in the US and competes with JP Morgan (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and American Express (NYSE:AXP) in the credit card business. Capital One’s card business earns revenue in the form of interest on outstanding credit card balances as well as fee-based charges.

Capital One is the 4th largest issuer of credit cards in the US with around $65 billion in outstanding credit card loans. Capital One’s credit card business accounts for 41% of the $50.53 Trefis price estimate for Capital One, which stands roughly 21% ahead of market value.

A greater than projected gain in November retail sales suggests that the economic recovery in the US is gaining momentum and presents upside for financial firms like Capital One whose profits are directly linked to consumer spending. Last month, the National Federation of Independent Business’ optimism index rose 1.5 points to 93.2, its highest level since December 2007, ^[1] an indication that businesses are ready to spend.

5% Upside – Higher Credit Card Purchase Volume

The total purchase volume of Capital One branded cards will benefit from higher consumer confidence and retail spending. We currently forecast the purchase volume to increase from $102 billion in 2009 to $111 billion in 2011 but a swift economic recovery could potentially push the purchase volume to nearly $130 billion by 2011, generating 5% upside to our price estimate for Capital One stock.

Drag the trend-line in the chart above to see how different purchase volume scenarios could impact Capital One’s stock value.

5% Upside – Increase in Outstanding Balance on Credit Cards

Capital One charges interest on outstanding credit card loans, which can increase significantly during periods of high consumer and business spending. The recently implemented CARD act by the US Congress, which forces credit card companies to disclose their rates and protects customers against unfair rate changes, is expected to boost consumer confidence, provoking increased spending and, consequently, higher outstanding credit card balances.

We currently estimate a moderate increase in outstanding credit card loan balance from $20.8 billion in 2009 to $21.1 billion in 2011. If outstanding loan balances instead increase to about $30 million by 2011 on the heels of improved consumer confidence, and approaches $50 million by 2017, there could be an additional 5% upside to our price estimate.

Drag the trend-line in the chart above to see how different outstanding credit card balance scenarios could impact Capital One’s stock value.

See our full analysis for Capital One here

1. See: The Wall Street Journal: Small Business Optimism Increases [↩]