Capital One Stock Is Trailing S&P500 By 8% YTD, What To Expect?

Capital One’s stock (NYSE: COF) has gained 6% YTD, as compared to the 14% rise in the S&P500 over the same period. In sharp contrast, Capital One’s peer Discover Financial (NYSE: DFS)was up 15% YTD. Overall, at its current price of $138 per share, COF stock is trading 8% below its fair value of $150 – Trefis’ estimate for Capital One’s valuation. 

Amid the current financial backdrop, COF stock has shown strong gains of 40% from levels of $100 in early January 2021 to around $140 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the rise 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 JPM, V, 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?

The company posted mixed results in the first quarter of 2024, with total revenues increasing by 6% y-o-y to $9.4 billion. It was driven by a 4% uptick in the net interest income (NII), followed by an 11% gain in the noninterest revenues. Notably, the NII contributes close to 80% of the top line and mainly increased due to growth in the credit card division. On the cost front, the provisions for credit losses witnessed a favorable drop of 4% y-o-y. Further, total non-interest expenses as a % of revenues decreased in the quarter. Overall, adjusted net income increased 35% y-o-y to $1.2 billion.

The top line grew 7% y-o-y to $36.8 billion in FY 2023. It was because of an 8% improvement in the net interest income and a 6% increase in the non-interest revenues. The growth in NII was due to higher interest-earnings assets and net interest margin. That said, the positive impact was more than offset by a 78% spike in the provisions figure to $10.4 billion. Altogether, the adjusted net income reduced by 35% y-o-y to $4.6 billion.

Moving forward, we expect the same trend to continue in Q2. Further, consensus estimates for Q2 revenues and earnings are $9.54 billion and $3.40 respectively. Overall, Capital One revenues are estimated to touch $38.46 billion in FY2024. Additionally, COF’s net income margin will likely remain around the same level as last year’s figure, resulting in an adjusted net income of $4.96 billion. This coupled with an annual GAAP EPS of $13.38 and a P/E multiple of just above 11x will lead to a valuation of $150.

[1] Returns as of 7/1/2024
[2] Cumulative total returns since the end of 2016

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