We expect Capital One Financial Corporation (COF) to beat expectations when it reports third-quarter 2014 results on Oct 16 after the market closes.
Why a Likely Positive Surprise?
Our proven model shows that Capital One is likely to beat earnings because it has the right combination of two key components.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.08%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.
Zacks Rank #2 (Buy): Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Buy) and 3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Capital One’s Zacks Rank #2 and ESP of +2.08% makes us confident of an earnings beat. Moreover, Capital One delivered positive earnings surprises in three out of the trailing four quarters, with an average earnings beat of 7.94%.
Factors to Drive Q3 Results
We expect Capital One’s third-quarter results to reflect sustained loan growth driven by consistent improvement in domestic cards and auto portfolios. Though the expected mortgage runoff and pressure on commercial loan growth may slightly weigh on the overall loan growth, management continues to predict pre-provision earnings of around $10 billion, triggered by growth in average loans.
Though Capital One’s expenses had been increasing over the past two years owing to the integration of two major acquisitions, the company’s effective cost control initiatives have resulted in a decline in operating expenses over the past few quarters. Management expects marketing expenses to rise due to seasonality. Nonetheless, we believe the company’s efforts to curb expenses will likely be reflected in the upcoming earnings release.
However, the persistent low interest rate environment is expected to keep Capital One’s top line under strain. Also, the company’s credit quality may remain under pressure owing to the prevalent sluggish macroeconomic conditions, resulting in elevated provision for credit losses.
Capital One’s activities during the quarter were adequate to win analysts’ confidence. Consequently, the Zacks Consensus Estimate increased nearly 1.6% to $1.92 per share over the last 7 days.
Other Stocks to Consider
Capital One is not the only firm looking up this earnings season. We also anticipate earnings beats from other companies in this industry:
Discover Financial Services (DFS) has an earnings ESP of +0.75% and a Zacks Rank #2. It is scheduled to report results on Oct 21.
The earnings ESP of World Acceptance Corp. (WRLD) is +1.38% and it has a Zacks Rank #2. The company is slated to release results on Oct 23.
Ally Financial Inc. (ALLY) has an earnings ESP of +2.44% and a Zacks Rank #3. It is slated to report results on Oct 29.
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