Capital One, one of the nation's biggest credit-card issuers, is known for television commercials asking "What's in your wallet?" But there's more to the firm than issuing plastic. It's been diversifying its business, recently focusing on the acquisition of two regional banks. Analysts at Standard Poor's say this is a smart strategy. But they think investors aren't giving the company enough credit and that, as a result, Capital One's stock is undervalued.
Credit cards remain Capital One's largest business, accounting for nearly half of its loan portfolio. A shift in focus in recent years from lower-quality to higher-quality customers -- those who are more likely to make their payments -- was a good move and should help the company's earnings growth prospects, SP analysts say.
But as growth in the domestic credit card industry slows, the company has looked to other engines to help fuel profits. One of those is auto loans, which Scott Valentin, an analyst at investment firm Friedman Billings Ramsey, expects to be the Capital One's primary growth driver this year. The company has also been expanding its international presence, in markets such as the United Kingdom and Canada, and building its banking business. Capital One completed the acquisition of New Orleans-based Hibernia bank last year, and in March announced plans to purchase North Fork Bancorp, a regional bank that serves the New York City metro area.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
SP analysts say the bank deals fit with Capital One's strategy of combining national lending with local branch banking. They like the acquisitions not only because they improve the firm's distribution capabilities, but also because they provide a base of low-cost deposits that Capital One can use to fund its loans. But analysts are unhappy about what they say is the overly generous price Capital One is paying for North Fork. That's one reason, SP analysts say, for the stock's uninspired performance this year. "While the purchase price is slightly above what we believe to be fair," SP says, "we are eager to see the addition of 355 branches and potential revenue-generating opportunities in the long term."
SP points to worries over stiff and growing competition as another reason for the stock's 1% decline so far this year. SP says Capital One's diversification moves should alleviate such fears, and they aren't worried that Capital One will have problems competing with more diversified banks. Meanwhile, the stock, at $86, sells for 11 times the $7.78 per share that analysts, on average, expect the company to earn in 2006, according to Thomson First Call. SP analysts think the stock can reach $100 over the next 12 months, and they view it as a core holding for long-term investors.
--Lisa Dixon
-
Cord Cutting Could Help You Save Over $10,000 in 10 YearsHow cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement RuleThe '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
My Three-Day Rule for Investing: And If it Applies NowStock Market I've seen a lot in my career. Here's what I see now in the stock market.
-
Is It Time to Invest in Europe?Stock Market Europe is being shaken out of its lethargy, militarily and otherwise, by Donald Trump's changes in U.S. policy. Should investors start buying?
-
Fed Leaves Rates Unchanged: What the Experts Are SayingFederal Reserve As widely expected, the Federal Open Market Committee took a 'wait-and-see' approach toward borrowing costs.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are Saying
Federal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
Why Is Warren Buffett Selling So Much Stock?Berkshire Hathaway is dumping equities, hoarding cash and making market participants nervous.
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
If You'd Put $1,000 Into Google Stock 20 Years Ago, Here's What You'd Have TodayGoogle parent Alphabet has been a market-beating machine for ages.
-
Fed Goes Big With First Rate Cut: What the Experts Are Saying
Federal Reserve A slowing labor market prompted the Fed to start with a jumbo-sized reduction to borrowing costs.
