Friday, January 19, 2007

Color on quarter: Capital One (NYSE:COF)

Several firms are commenting on Capital One Financial (NYSE:COF) after the co released its Q4 results last night. While most comments are positive in nature (COF is a former analyst darling), I suspect the calls from CIBC and Merrill Lynch make the most sense:

- CIBC notes they believe there is still a love affair going on between analysts and investors and Capital One. After all, the stock made people a lot of money in the 1990s and people remember a good thing. But COF is no longer a growth stock, in firm's view, and has even guided to flat earnings for 2007.

While at 10X their 2007 EPS estimate, the stock looks attractive to some, on value, they believe that until COF pays a competitive dividend with other banks it will trade at a 10X multiple. Currently, COF's div is just 0.14% vs. a 3.5% avg. for banks. COF cannot increase its dividend until at least 2008.

COF reported fourth-quarter EPS of $1.14 vs. $0.97, and well short of consensus of $1.24. What's worse, the company provided 2007 guidance that is effectively flat with 2006 prior guidance and actual performance. Competitive pressures, a flat yield curve, and prolonged integration expenses threw cold water on previous aspirations for higher earnings potential for this year. COF's credit outlook was pretty good: normalization but not a spike in credit delinquencies and losses.

CIBC is lowering their 2007 EPS estimate to $7.20 from $8.20 to reflect COF s transition toward lower margin and less risky businesses. They expect expense growth to decelerate through 2007 and credit losses to normalize. Firm is establishing 2008 EPS estimate of $8.50. Maintains Sector Performer.

- Merrill Lynch says COF Q4'06 results had something for everyone, as the reported EPS was below consensus and the NFB deal close added enough noise to confuse interpretation of the results. 2007 EPS guidance of $7.40-$7.80 likely disappoints, as the Street is at $8.11, though there is room for an upside surprise if credit remains good. Also, there was some speculation that guidance could be lower with investors looking for protection in the options market before the release, so COF shares could react positively to the release on relief that the guidance wasn't worse.

They think the stock could see some weakness today, though they think there is support for the shares at 9.6x 2007e EPS. COF reported adjusted Q4'06 EPS of $1.08, net of a 1x items that increased EPS by $0.06, which was well-below consensus of $1.24 and ML estimate of $1.21. The source of the miss was Bank segment under-performance followed by a modest GFS shortfall on higher expenses.

Maintains Buy.

Notablecalls: So that's why there was some buying COF in after hours! After pouring over COF's results last night I just don't see how anyone can believe management's guidance for 2007. The US Cards segement will surely deteriorate in 2007. Considering this segment makes up for most of COF's bottom line the stock continues to be radioactive here. It's a sell.

2 comments:

Trade Smart said...

Your doing a great job. Keep up the good work.

Vic said...

The company trades at a p/book of 1.4x....Forward P/E of 10....just as a pure value play this stock is very appealing.

Trades at the same mkt. cap (US$ 23bn) it did a year ago...before acquiring Hibernia and NFB (total of US$ 18bn)....so the market is pricing COF before the acquisition at US$ 5bn?! Or simply the street doesn't believe that either of those acquisitions will add value to the stock….or that COF grossly overpaid.

Guidance is disappointing but I think analysts find the valuation of the stock very compelling...p/e of 10 and p/book of 1.4....B.Graham's magical multiple would give 14...well under the 22 he suggested as an inflection point to judge when a stock is undervalued.

Just my two cents...would like to see what people think.