Is Capital One Stock Still Attractive At The Current Levels?

Capital One’s stock (NYSE: COF) has lost approximately 29% YTD, as compared to the 18% drop in the S&P500 over the same period. Further, at its current price of $103 per share, the stock is trading 28% below its fair value of $142 – Trefis’ estimate for Capital One’s valuation. The credit card giant missed the consensus estimates in the second quarter of 2022, despite a 12% y-o-y increase in revenues to $8.23 billion. The growth in the top line was driven by a 19% rise in credit card revenues, followed by a 26% improvement in the commercial banking business. The credit card segment benefited from a 21% growth in net interest income (NII) and a 13% increase in noninterest revenues. While the NII benefited from higher interest rates and positive loan growth, the noninterest revenues were up due to higher purchase volume. Similarly, the growth in the commercial banking segment was primarily driven by a 38% rise in the NII, thanks to an improvement in outstanding loan balance and an increase in interest rates. On the flip side, the company witnessed an unfavorable build-up in the provision for credit losses from -$1.16 billion to $1.08 billion. Further, the noninterest expense as a % of revenues also increased from 53.8% to 55.7%. Overall, it translated into an adjusted net income of $1.95 billion – down 43% y-o-y.

The total revenues for the first half of 2022 grew 13% y-o-y to $16.4 billion. It was because of a 12% rise in the NII and a 19% increase in the noninterest revenues. Notably, the NII contributes close to 80% of the top line. Despite this, the firm’s adjusted net income declined 36% y-o-y to $4.27 billion. It was due to an increase in provisions for credit losses and higher noninterest expenses as a % of revenues.

The Federal Reserve has increased the benchmark interest rates four times in 2022. We expect the NII to continue its growth momentum over the subsequent quarters. Further, improvement in consumer activity levels will benefit the noninterest revenues. Altogether, we forecast Capital One revenues to touch $33.4 billion in FY2022. Additionally, COF’s net income margin is likely to decrease from 39.3% to around 24% in the year, leading to an adjusted net income of $8 billion and an annual EPS of $20.70. This coupled with a P/E multiple of just below 7x will lead to the valuation of $142.

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