On Dec 26, 2019, we issued an updated research report on Capital One Financial Corporation COF. The company’s solid liquidity position, strength in credit card and online-banking businesses, and efforts to diversify via acquisitions will likely drive top-line growth.
Moreover, the Zacks Consensus Estimate for its current-year earnings has been revised marginally upward over the past 60 days, reflecting that analysts are optimistic regarding its earnings growth potential.
Also, shares of Capital One have gained 14% over the past six months compared with 5.1% rally of the industry it belongs to.
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However, rising operating expenses mainly due to higher marketing costs and deteriorating credit quality remain major near-term concerns for the company.
Thus, the stock currently carries a Zacks Rank #3 (Hold).
Looking at its fundamentals, the company’s top line has witnessed a five-year (2014-2018) CAGR of 5.9%. Steady loan growth and opportunistic acquisitions over the past few years have continued to support its revenues. In fact, revenue growth prospects look encouraging on the back of the company’s solid credit card and online banking businesses.
Moreover, Capital One’s Credit Card segment is likely to continue showing strength, given the domestic economic recovery and rise in consumer spending. Notably, management expects to witness strong growth opportunities in card loans and purchase volumes despite an intense competitive environment.
Further, the company’s capital deployment activities remain decent. Its 2019 capital plan, approved by the Federal Reserve in June, included maintaining the quarterly dividend at the current level and authorization to buy back $2.2 billion worth shares. Driven by a solid balance sheet position and continued earnings strength, the company will likely be able to sustain its capital deployment activities.
However, the company’s expenses witnessed a CAGR of 5.2% over the last five years (2014-2018). The increase was mainly due to rise in marketing costs, which are likely to remain elevated given the rising loan growth opportunities. Further, continued investments in technology and infrastructure will keep expenses on a higher side, thus hurting the bottom line to an extent.
Moreover, Capital One’s asset quality has been deteriorating. Provision for credit losses and net charge-off (NCO) rates has been steadily rising. Both witnessed an increase in the first three quarters of 2019. Hence, the company’s overall credit quality is likely to remain under pressure.
Stock to Consider
A few better-ranked stocks from the finance space are Apollo Investment Corporation AINV, FS KKR Capital Corp. FSK and Ares Capital Corporation ARCC, all currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The consensus estimate for Apollo Investment’s current fiscal-year earnings has been revised 7.1% upward over the past 60 days. Also, the company’s share price has rallied 11.3% over the past six months.
FS KKR Capital’s current-year earnings estimates have been revised 6.8% upward over the past 60 days. Further, the company’s shares have gained 3.7% over the past six months.
The Zacks Consensus Estimate for earnings of Ares Capital has been revised 1.6% upward for 2019 over the past 60 days. Shares of the company have gained 3.5% over the past six months.
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