Will Capital One Financial Bounce Back?

With shares of Capital One Financial Corp (NYSE:COF) trading at around $57.17, is COF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Capital One Financial has been getting hammered today following poor earnings and guidance. Q4 net income came in at $843 million, or $1.31 EPS. FY2012 net income came in at $3.5 billion, or $6.16 EPS. 2012 results reflect acquisition-related accounting and the number of shares outstanding. Capital One Financial also saw seasonal expenses and margin trends. More of the same is expected in 2013 if the external environment doesn’t change. For 2013, Capital One Financial sees a modest decline in earnings being offset by a slightly higher net interest margin. Capital One Financial expects to pay a meaningful dividend in 2013.

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Heading into this earnings report, 75 percent of analysts were on the Buy side. The other 25 percent recommended a Hold. There were zero analysts on the Sell side. However, that might change soon. Margins and cash flow are still healthy, which are arguably the most important factors. Let’s take a look at some other important numbers before forming an opinion…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio Capital One Financial isn’t strong compared to companies in other industries, but it’s excellent for the credit services industry. The balance sheet is weak and could use improvement.

Debt-To-Equity

Cash

Long-Term Debt

COF

0.97

$6.73 Billion

$37.41 Billion

AXP

3.32

$3.99 Billion

$60.30 Billion

DFS

2.06

$12.49 Billion

$20.01 Billion

 

T = Technicals on the Stock Chart Are Mixed

Capital One Financial has performed well over the past year, but it has still underperformed American Express Company (NYSE:AXP) and Discover Financial Services (NYSE:DFS). The same can be said for a three-year time frame. In addition to that, Capital One Financial currently yields 0.30 percent whereas American Express Company yields 1.30 percent, and Discover Financial Services yields 1.40 percent.

1 Month

Year-To-Date

1 Year

3 Year

COF

-4.73%

-1.55%

16.54%

40.67%

AXP

3.35%

3.96%

19.42%

47.24%

DFS

-4.76%

-0.23%

44.60%

168.10%

 

At $57.17, Capital One Financial is trading below its 50-day and 100-day SMA, and above its 200-day SMA.   

50-Day SMA

58.87

100-Day SMA

58.49

200-Day SMA

56.27

 

E = Earnings and Revenue Had Been Steady

Prior to 2012, earnings had been steadily improving since 2009. Revenue has been inconsistent.

2007

2008

2009

2010

2011

Revenue ($)in billions

19.13

17.86

15.95

19.07

18.52

Diluted EPS ($)

3.97

-0.21

0.74

6.01

6.80

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

4.71

4.57

5.50

5.67

6.39

Diluted EPS ($)

1.77

0.85

2.72

0.16

2.01

 

T = Trends Might Support the Industry

If you want to know how credit services companies will perform, simply look at the status of the broader economy. If you compare Capital One Financial or American Express to the S&P 500, you will see very similar results. Therefore, when you own stock in one these companies, you’re essentially betting on the state of the economy. You might want to argue that Capital One Financial and American Express don’t trade together. That might be the case today, or even over the course of several months, but if you compare 5-year charts, you will see nearly identical performances. That being the case, if you choose to invest in this industry, then your decision should come down to which company pays a better dividend.

Conclusion

Our leaders are still kicking the can down the road. I’m also sick of that phrase, but is there any better way to describe it? As long as this trend continues, credit service companies have an opportunity to be good investments. However, based on recent results and yield, Capital One Financial doesn’t seem to be the best option.

Capital One Financial is currently a STAY AWAY.

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