Capital One Missed The Consensus In Q1, What’s Next?

-2.49%
Downside
149
Market
145
Trefis
COF: Capital One Financial logo
COF
Capital One Financial

Capital One’s stock (NYSE: COF) has lost 4% YTD, as compared to the 8% increase in the S&P500 over the same period. Further, at its current price of $89 per share, the stock is trading 19% below its fair value of $110 – Trefis’ estimate for Capital One’s valuationThe company missed the consensus estimates in the first quarter of 2023, despite a 9% y-o-y increase in revenue to $8.9 billion. The revenues benefited from a 12% rise in the net interest income (NII), partially offset by a 3% drop in the noninterest revenues. The NII benefited from a higher net interest margin and an increase in the outstanding loan balance. On the cost front, the provisions for credit losses witnessed an unfavorable build-up from $677 million to $2.8 billion. This coupled with a 9% rise in non-interest expenses, led to a 62% decline in the adjusted net income to $887 million.

The top line improved 13% y-o-y to $34.3 billion in FY 2022, driven by a 12% rise in the net interest income and a 14% growth in the non-interest revenues. It was partly due to higher interest rates and loan growth, and partly because of a recovery in consumer spending. That said, the provisions figure rose from -$1.9 billion to $5.8 billion. Further, the non-operating expenses increased by 16% in the year. Overall, it resulted in a net loss of 41% despite positive revenue growth.

Moving forward, we estimate Capital One revenues to touch $36.9 billion in FY2023. Additionally, COF’s net income margin is likely to reduce from 20.6% to 11.9% in the year, leading to an adjusted net income of $4.4 billion and an annual GAAP EPS of $11.94. This coupled with a P/E multiple of just above 9x will lead to a valuation of $110.

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 Returns May 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 COF Return -8% -4% 2%
 S&P 500 Return -1% 8% 85%
 Trefis Multi-Strategy Portfolio 0% 8% 240%
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[1] Month-to-date and year-to-date as of 5/9/2023
[2] Cumulative total returns since the end of 2016

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