Capital One’s stock (NYSE: COF) has gained 14% YTD, as compared to the 15% rise in the S&P500 over the same period. Further, at its current price of $106 per share, the stock is trading 5% below its fair value of $112 – Trefis’ estimate for Capital One’s valuation.
Amid the current financial backdrop, COF stock has seen little change, moving slightly from levels of $100 in early January 2021 to around $105 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. Overall, the performance of COF stock with respect to the index has been lackluster. Returns for the stock were 47% in 2021, -36% in 2022, and 14% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that COF underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financial sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could COF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?
The company posted better-than-expected results in the third quarter of 2023, with total revenues increasing by 6% y-o-y to $9.4 billion. It was driven by a 6% rise in the net interest income (NII), followed by an 8% growth in the noninterest revenues. Notably, the NII benefited from higher interest-earning assets, partially offset by a drop in net interest margin. On the cost front, noninterest expenses as a % of revenues and effective tax rate witnessed a favorable decrease. However, the impact was more than offset by a 37% increase in the provisions for credit losses. Overall, the adjusted net income improved 6% y-o-y to $1.7 billion.
The top line grew 8% y-o-y to $27.3 billion in the first nine months of FY 2023, driven by a 9% rise in the net interest income and a 5% growth in the non-interest revenues. That said, a significant build-up in the provisions figure and higher expenses as a % of revenues, led to a 33% y-o-y drop in the adjusted net income to $3.94 billion.
Moving forward, we estimate Capital One revenues to touch $36.4 billion in FY2023. Additionally, COF’s net income margin is likely to decline from 20.6% to 11.9% in the year, resulting in an annual GAAP EPS of $11.71. This coupled with a P/E multiple of just below 10x will lead to a valuation of $112.
|S&P 500 Return||5%||15%||96%|
|Trefis Reinforced Value Portfolio||5%||23%||531%|
 Month-to-date and year-to-date as of 11/6/2023
 Cumulative total returns since the end of 2016
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