Capital One Stock Has Limited Upside Potential

Capital One’s stock (NYSE: COF) has gained roughly 20% YTD, as compared to the 7% increase in the S&P500 over the same period. Further, at its current price of $112 per share, the stock is trading 4% below its fair value of $117 – Trefis’ estimate for Capital One’s valuation. The credit card giant posted mixed results in the fourth quarter of 2022, with revenues beating the estimates but earnings missing the mark. It reported total revenues of $9.04 billion – up 11% y-o-y, driven by a 12% rise in net interest income (NII) and a 10% increase in non-interest revenues. The NII benefited from loan growth and higher interest rates. Similarly, growth in non-interest income was due to improvement in consumer spending levels. Notable, the credit card purchase volume rose by 4% y-o-y to $155.6 billion. That said, the adjusted net income was declined by 49% y-o-y to $1.16 billion in the quarter. It was because of an unfavorable build-up in provisions for credit losses from $381 million to $2.4 billion and higher non-interest expenses. 

The top line grew 13% y-o-y to $34.25 billion in FY 2022. It could be attributed to a 12% y-o-y increase in NII, followed by a 14% rise in non-interest income. Notably, average outstanding loan balance and credit card purchase volume improved by 13% y-o-y and 11%, respectively. On the cost front, the company witnessed a 41% y-o-y drop in the adjusted net income, despite positive revenue growth. It was due to a significant increase in the provisions figure and higher non-operating expenses.

The Federal Reserve has increased the benchmark interest rates eight times since March 2022. We expect the NII to drive growth over the subsequent quarters. Altogether, we estimate Capital One revenues to touch $36.9 billion in FY2023. Additionally, COF’s net income is likely to remain around $5.8 billion, along with an annual EPS of $16.03. This coupled with a P/E multiple of just above 7x will lead to a valuation of $117.

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[1] Month-to-date and year-to-date as of 2/17/2023
[2] Cumulative total returns since the end of 2016

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