Weekly Equity Idea Highlight - 2019 11 15
The market is much more pessimistic about COF than 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 it is in line 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 14%+ the last several years—to see ROA' fall by one-half. The market is clearly spooked by increased cost to borrow for financials and theoretical recessionary risks, 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, not declining, 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 and profitability growth. They are showing confidence about their competitive positioning, and favorable trends they are seeing in their credit card and bank deposits segments. These markers line up with confidence from management over the past several quarters around improved top-line growth, and their outlook for costs.
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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