ModernGraham Valuation: Capital One Financial (COF)

moneyCompany Profile (obtained from Google Finance): Capital One Financial Corporation is a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries offer an array of financial products and services to consumers, small businesses and commercial clients through branches, the Internet and other distribution channels. As of December 31, 2012, the Company’s principal subsidiaries included Capital One Bank (USA), National Association (COBN), which offers credit and debit card products, other lending products and deposit products, and Capital One, National Association (CONA), which offers a spectrum of banking products and financial services to consumers, small businesses and commercial clients. On February 17, 2012, the Company acquired ING Direct business in the United States (ING Direct) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp. In November 2013, Capital One Financial Corp acquired Beech Street Capital LLC.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $244.83
MG Opinion Undervalued
Value Based on 3% Growth $92.21
Value Based on 0% Growth $54.05
Market Implied Growth Rate 1.88%
PEmg 12.27
PB Ratio 1.09

Balance Sheet – 9/30/2013 

Total Debt $30,159,000,000
Total Assets $289,888,000,000
Intangible Assets $13,906,000,000
Total Liabilities $248,138,000,000
Outstanding Shares 581,940,000

Earnings Per Share

2013 (estimate) $6.76
2012 $6.54
2011 $7.03
2010 $6.68
2009 $0.98
2008 $0.14
2007 $6.55
2006 $7.62
2005 $6.73
2004 $6.21
2003 $4.92

Earnings Per Share – ModernGraham 

2013 (estimate) $6.36
2012 $5.53
2011 $4.78
2010 $3.90
2009 $3.14
2008 $4.63

Conclusion:

Capital One Financial is a company that stands out from its peers, having survived the financial meltdown without posting a negative earnings year.  This company is not suitable for the Defensive Investor, due to not sufficiently growing earnings over the ten year period, but it is suitable for the Enterprising Investor.  Capital One appears to have solid earnings stability, a strong dividend history, and is trading at low PEmg and PB ratios.  Value investors seeking to follow Benjamin Graham’s methods for the Enterprising Investor should feel very comfortable proceeding with further research, beginning with a review of ModernGraham’s Valuation of American Express (AXP).  In terms of a valuation, the company has grown EPSmg (normalized earnings) from $3.14 in 2009 to an estimated $6.36 in 2013.  This is solid growth that more than supports the market’s implied estimate for growth of 1.88%, indicating the company may be undervalued presently.

What do you think?  Do you agree that Capital One Financial is undervalued?  What would be your assessment?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Capital One Financial (COF) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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