Is Capital One Oversold At $62?

by Trefis Team
+11.86%
Upside
60.80
Market
68.01
Trefis
COF
Capital One
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Having gained nearly 40% since hitting a low of $43 on March 23, Capital One’s stock (NYSE: COF) may yet increase quite a bit more over the coming months. The potential upside to Capital One’s stock can be attributed to the fact that it is still a good 40% behind the $103 figure seen at the beginning of 2020 and almost 20% lower than the previous multi-year low seen at the end of 2018.

Our dashboard, ‘What Factors Drove 24.5% Change In Capital One Stock Between 2016 And 2019?‘, provides the key numbers behind our thinking, and we explain more below. Capital One’s revenues have grown roughly by 13% from 2016 to 2019, which translated into a 49% growth in Net Income due to a combination of lower tax rates and increased net income margins (which boosted operating profits). Earnings per share swelled 60% over the period due to an added boost from share buybacks. Specifically, the company has invested about $2.9 billion in repurchases in the last three years – resulting in about 7.4% lower outstanding shares.

However, Capital One’s P/E ratio reduced by 22% from about 11.8x at the end of 2016 to 9.2x at the end of 2019. While Capital One’s P/E is down to the lowest level in several years at 5.3x, there is a possible upside for Capital One’s multiple when compared to levels seen in the past years – 9.2x at the end of 2019 and the previous multi-year low of 6.2x in late 2018.

How Is Coronavirus Impacting Capital One’s Stock?

Capital One’s stock has suffered as states and countries are on lockdown, which would negatively impact consumer demand. People aren’t meeting friends and colleagues for drinks, lunch, or dinner; they are not going to movies, amusement parks, vacation trips, and are refraining from any non-essential expenditure. As the credit card giant derives most of its revenues from card business, it could suffer losses due to lower consumer demand and an expected spike in loan default rates. While the results for Q1 2020 were partially affected by these trends, we believe Capital One’s Q2 results will confirm this reality with a drop in both credit card revenues and transaction volume as well as an increase in loan losses. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.

However, if there are significant improvements by the time Q2 results are announced, the company’s stock could see a sizable uptick. Further, Capital One’s 42% decline since the beginning of 2020 means that the company has underperformed the S&P 500 (-13%) as well as its peer American Express (-30%) over this period. We believe that Capital One’s stock presents a good upside potential post coronavirus.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the Coronavirus outbreak’s impact on a diverse set of Capital One’s peers. The complete set of coronavirus impact and timing analyses is available here.

Capital One’s stock has underperformed that for its peer American Express since the beginning of 2020. We analyzed the reasons behind the movement in American Express stock since 2017 to understand this apparent discrepancy.

 

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