Weekly Equity Idea Highlight - 201810 17
The market is much more pessimistic about COF than about any of the company's peers currently. The company trades at a significant discount to both their Consumer Finance and Regional Bank peers, even as the company's ROE' shows in like with Regional Bank peers, and their cost to borrow is below Consumer Finance peers.The market is pricing the company—that has had robust and stable ROE around 15% the last several years—to see ROA' fall by 1/3. The market is clearly spooked by increased cost to borrow for financials, though not recognizing that COF has done an excellent job of improving their unlevered returns to offset any increase in their cost to borrow. And considering accelerating economic trends, they are likely to continue to see those tailwinds.
Furthermore, management alignment, which focuses them on improving profitability and driving growth while also managing risk, should lead to sustained strong returns and growth, and limit negative shocks to returns. Finally, management has been showing growing confidence about their outlook for the business. They are showing confidence about reducing expenses, while investing in the business and technology to drive growth. They also are showing confidence around normalization of the competitive environment, in particular in the auto segment, and how they are positioned competitively, and they are confident about profitability growth.
Considering low market expectations, management's strong operational success, macro tailwinds from an improving economy, and robust returns relative to low market expectations, there appears to be equity upside potential for COF.
Capital One Financial is a financial services holding company. Through its subsidiaries, the company provides an array of financial products and services. The company's segments are: Credit Card, which consists of the company's domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom.; Consumer Banking, which consists of the company's deposit gathering and lending activities for consumers and small businesses, and national auto lending; and Commercial Banking, which consists of the company's lending, deposit gathering, capital markets and treasury management services to commercial real estate and commercial and industrial customers.
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- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
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- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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