Up 40% Since The Beginning Of 2023, How Will Capital One Stock Trend After Q4 Earnings

Capital One (NYSE: COF) is scheduled to report its fiscal Q4 2023 results on Thursday, January 25, 2024. We expect the revenues to be just above (in line) the expectations, while earnings are likely to miss the consensus. The company outperformed the street estimates in the last quarter, with the top line increasing 6% y-o-y to $9.4 billion. It was primarily due to a 6% growth in the net interest income (NII), which benefited from higher interest-earning assets. Further, the noninterest revenues rose by 8% in the quarter. We expect the same momentum to continue in the fourth quarter. Our interactive dashboard analysis on Capital One’s Earnings Preview has more details. 

Amid the current financial backdrop, COF stock has shown strong gains of 30% from levels of $100 in early January 2021 to around $130 now, vs. a similar change for the S&P 500 over this roughly 3-year period. However, the increase in COF stock has been far from consistent. Returns for the stock were 47% in 2021, -36% in 2022, and 41% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that COF underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could COF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that Capital One’s valuation is $135 per share, which is 4% above the current market price of $130. 

(1) Revenues expected to be marginally above the consensus estimates

Capital One’s revenues grew 8% y-o-y to $27.3 billion in the first three quarters of 2023. It was due to a 9% increase in the NII and a 5% rise in the noninterest revenues.

• The NII improved 9% y-o-y over the first nine months of 2023 because of higher interest-earning assets. We expect the same momentum to follow in Q4.
• The noninterest revenues grew 5% y-o-y over the same period. It was primarily because of higher net interchange fees, which benefited from higher card purchase volume. We expect the same trend to continue in Q4.
• Overall, we forecast Capital One’s revenues to touch $36.78 billion for FY2023.

Trefis estimates Capital One’s fiscal Q4 2023 revenues to be around $9.49 billion, just above (in line) the $9.46 billion consensus estimate. 

(2) EPS is likely to miss the consensus estimates

Capital One Q4 2023 adjusted earnings per share (EPS) is expected to be $2.60 per Trefis analysis, 2% below the consensus estimate of $2.64. The adjusted net income decreased 33% y-o-y to $3.9 billion in the first nine months of 2023. It was because of a significant jump in provisions for credit losses from $3.43 billion to $7.57 billion. However, we expect the net interest margin to see some improvement in the fourth-quarter results. Overall, Capital One is likely to report an annual GAAP EPS of $12.91 for the full-year 2023.

(3) The stock price estimate is 4% higher than the current market price

We arrive at Capital One’s valuation, using an EPS estimate of around $12.91 and a P/E multiple of just above 10x in fiscal 2023. This translates into a price of $135, which is 4% above the current market price of around $130. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

[1] Returns as of 1/23/2024
[2] Cumulative total returns since the end of 2016

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