Capital One Financial: More Than Credit
This credit card issuer is becoming a more diversified financial-services company. And some analysts think its prospects aren't fully reflected in its share price.
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
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Three Gen X Retirement Mistakes for Millennials, Gen Z to Avoid
Many Gen Xers haven’t prioritized saving for retirement and face a crisis as the first generation to retire without substantial support from pension plans.
By Tiffani Potesta Published
-
How To Use Beta in Investing
Beta is one way to measure a stock's historical volatility. Here's how it works.
By Coryanne Hicks Published
-
Stock Market Today: Stocks Soar on Apple Buyback News, Jobs Data
The main indexes rallied hard to end the week thanks to Apple's $110 billion stock repurchase plan and a big April payrolls miss.
By Karee Venema Published
-
Stock Market Today: Stocks Sizzle Ahead of Apple Earnings, Jobs Report
The Nasdaq outperformed in a strong day for stocks thanks to Qualcomm's post-earnings pop.
By Karee Venema Published
-
Stock Market Today: Stocks Pop Then Drop After Fed Meeting
Stocks went on a roller-coaster ride after Fed Chair Powell said interest rates were likely at a sufficiently restrictive level.
By Karee Venema Published
-
Fed Holds Rates Steady at 23-Year High: What the Experts Are Saying
Federal Reserve The Federal Reserve struck a dovish pose even as it kept interest rates unchanged for a sixth straight meeting.
By Dan Burrows Published
-
Stock Market Today: Stocks Sell Off Ahead of Fed Decision
Stocks sold off sharply Tuesday as anxiety set in ahead of Wednesday's policy statement from the Federal Reserve.
By Karee Venema Published
-
Stock Market Today: Markets Post Broad-Based Gains Thanks to Mega-Cap Tech
Stocks get help from a couple of laggard Magnificent 7 stocks.
By Dan Burrows Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published