Is Capital One Undervalued?

by Trefis Team
Capital One
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Capital One (NYSE:COF) is one of the largest credit-card issuers in the U.S, whose banking and non-banking subsidiaries offer credit & debit cards, commercial lending and consumer lending services to retail consumers, small businesses and corporate clients. Trefis has a price estimate of $103 for Capital One’s stock, which is 5% ahead of the current market price. Our price estimate takes into account Capital One’s earnings beat for the third quarter. The bank reported total revenues of $6.96 billion which was similar to the figure a year ago. While Non-Interest income improved 4% year-on-year, these gains were offset by a reduction in Net Interest Income due to a 28 basis points (bps) drop in net interest margin.

We have detailed the key components of Capital One’s valuation in an interactive dashboard, along with our forecast for the full year 2019.

The stock price estimate can be divided into 4 factors: Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio 


Drop In Growth Rate Likely To Result In Capital One’s Revenues Being $28.2 Billion For Full-Year 2019

  • In 2019, we expect Total Revenues to be $28.2 billion, or 2% more than the level in 2018.
  • Credit Card division is expected to report a 3% jump in revenues followed by 1% increase in consumer loans, partially offset by 2% drop in commercial loans segment.
  • Outstanding credit card balance is expected to be around $112 billion in 2019, an increase of 2% y-o-y.
  • However, net interest yield on credit card loans are expected to drop 12 bps as compared to the previous year.
  • This would largely offset the positive effect of growth in credit card loans and enable net interest income to cross $14.3 billion in 2019 – a meager growth of 1% y-o-y.

Our interactive dashboard for Capital One details the factors that have driven changes in revenues of Capital One’s individual revenue streams over recent years along with our forecast for the next three years.


This Coupled With Higher Expenses Should Reduce The Net Income Figure

  • Total Expenses are expected increase to $21.2 billion due to higher provision for credit losses, partially offset by operational efficiency measures.
  • This coupled with a higher effective tax rate as compared to the previous year would reduce the net income margin to 18.5%.
  • This translates into a net income figure of $5.2 billion for the year, 8% less than 2018.


And Lends Support To A $103 Price Estimate For Capital One’s Shares

  • Capital One has regularly invested in share repurchases to boost shareholder returns. Its share repurchase is likely to touch $1.1 billion for the full year 2019.
  • This is likely to result in the bank reporting an EPS figure of $11.09 in 2019.
  • This EPS figure coupled with our forward P/E multiple of 9.3x works out to a price estimate of $103 for Capital One’s Stock.

Details about how Capital One’s P/E multiple compares with peers Citigroup, JPMorgan and Bank of America is available in our interactive dashboard.


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