Financial Services Stocks

Capital One Financial Stock Analysis – May 2015 Quarterly Update $COF

500px-Capital_One_Financial_logo.svgIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a Capital One Financial stock analysis giving a specific look at how Capital One Financial (COF) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Capital One Financial Corporation is a diversified financial services holding company with banking and non-banking subsidiaries. The Company and its subsidiaries offer a range of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of September 30, 2014, its principal subsidiaries included: Capital One Bank (USA), National Association (COBNA), 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. The Company’s principal operations are organized for management reporting purposes into three primary business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking.

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 - FAIL
  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 - PASS
  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

Key Data:

Recent Price $84.21
MG Value $206.06
MG Opinion Undervalued
Value Based on 3% Growth $103.54
Value Based on 0% Growth $60.70
Market Implied Growth Rate 1.65%
PEmg 11.79
PB Ratio 1.03

Balance Sheet - March 2015

Total Debt $40,096,000,000
Total Assets $306,224,000,000
Intangible Assets $13,978,000,000
Total Liabilities $260,494,000,000
Outstanding Shares 557,200,000

Earnings Per Share

2015 (estimate) $7.35
2014 $7.59
2013 $6.96
2012 $6.16
2011 $6.80
2010 $6.01
2009 $0.74
2008 -$0.21
2007 $3.97
2006 $7.62
2005 $6.73

Earnings Per Share – ModernGraham 

2015 (estimate) $7.14
2014 $6.93
2013 $6.17
2012 $5.15
2011 $4.25
2010 $3.20

Dividend History


Capital One qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $4.25 in 2011 to an estimated $7.14 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 1.65% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Capital One Financial (COF)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any of the companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

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