Capital One Stock Gained 44% In The Last 6 Months, What’s Next?

+3.41%
Upside
145
Market
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Trefis
COF: Capital One Financial logo
COF
Capital One Financial

Capital One’s stock (NYSE: COF) has gained 7% YTD, as compared to the 9% rise in the S&P500 over the same period. Further, at its current price of $141 per share, the stock is trading 3% below its fair value of $145 – Trefis’ estimate for Capital One’s valuation

Amid the current financial backdrop, COF stock has shown strong gains of 40% from levels of $100 in early January 2021 to around $140 now, vs. a similar change for the S&P 500 over this roughly 3-year period. However, the increase in COF stock has been far from consistent. Returns for the stock were 47% in 2021, -36% in 2022, and 41% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 Financials sector including JPM, V, 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?

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The company posted mixed results in the fourth quarter of 2023, with total revenues increasing by 5% y-o-y to $9.5 billion. It was driven by a 4% rise in the net interest income (NII), followed by an 8% growth in the noninterest revenues. In terms of business units, the credit card segment reported a 14% gain in revenues, followed by a 10% improvement in the commercial banking division. However, it was somewhat offset by a 17% decrease in the consumer banking business. On the cost front, the provisions for credit losses witnessed an unfavorable increase of 18% y-o-y. Further, total non-interest expenses rose by 13% in the quarter. Overall, adjusted net income declined by 45% y-o-y to $639 million.

The top line grew 7% y-o-y to $36.8 billion in FY 2023, driven by an 8% rise in the net interest income and a 6% increase in the non-interest revenues. Notably, the net interest income contributes close to 80% of the revenues. That said, the positive impact of revenue growth was more than offset by a 78% jump in the provisions figure of $10.4 billion. Altogether, the adjusted net income decreased 35% y-o-y to $4.6 billion. 

Moving forward, we forecast Capital One revenues to touch $38.3 billion in FY2024. Additionally, COF’s net income margin is likely to see some improvement in the year, resulting in an adjusted net income of $5.2 billion. This coupled with an annual GAAP EPS of $13.96 and a P/E multiple of just above 10x will lead to a valuation of $145.

 Returns Mar 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 COF Return 2% 7% 61%
 S&P 500 Return 2% 9% 132%
 Trefis Reinforced Value Portfolio 0% 5% 645%

[1] Returns as of 3/27/2024
[2] Cumulative total returns since the end of 2016

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