On Dec 30, 2014, we issued an updated research report on Capital One Financial Corporation (COF). The company continues to exhibit prudent expense management and its Credit Card operation remains strong.
Over the past several quarters, Capital One’s operating expenses have witnessed a steady decline. Though expenses had been mounting over the past two years, we believe that it was due to the two major acquisitions closed by the company. In the coming quarters, the company expects costs to remain controlled, though marketing expenses are anticipated to increase.
Further, Capital One’s Credit Card segment exhibits robust growth. In 2012, the company had acquired HSBC Holdings Plc’s (HSBC) U.S. credit card business with an aim to boost its growth. Notably, Domestic Card accounted for nearly 90% of net revenue for the Credit Card segment in the first nine months of 2014. Given the recovery in the economy, we believe that the segment will continue to perform impressively.
On the flip side, subdued revenues remain a major concern for Capital One. Though the top line showed significant improvement over the past two years (2012–2013), we believe this was mainly driven by the acquisitions of ING Direct USA and HSBC’s U.S. credit card business.
Over the last few quarters, revenues have been showing a declining trend. Despite signs of improvement in the overall economy, we believe that Capital One’s top line will remain under pressure until the rates rise (which is not expected before mid-2015) and loan demand increases.
Additionally, analysts have been bearish about Capital One’s future prospects owing to persistent pressure on revenues. Over the past 30 days, the Zacks Consensus Estimate for both 2014 and 2015 declined by a penny each to $7.63 per share and $7.74 per share, respectively.
Capital One currently carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Some better-ranked finance stocks include Navient Corporation (NAVI) and World Acceptance Corp. (WRLD). Both these stocks sport a Zacks Rank #2 (Buy).
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