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Capital One: A Winning Company for your Portfolio?

Tuesday, October 31st, 2017

Whether it be on our Smart Investing Radio Show or just studying companies in the market, lately I feel I have been giving numerous companies a sell rating. It is not that I am a pessimistic person, but rather it is challenging to find strong buys in the current market. Being an experienced investor with over 40 years of experience, I know sometimes it is difficult to remain patient and disciplined, but in the long term finding good value companies with strong fundamentals pays off.

One group of companies I have liked for a few years has been financials. These companies have increased in value, but they still look to be a good value especially during a rising interest rate environment.

One company that stands out is Capital One Financial (COF). We mainly recognize Capital One for its credit card business, but it also offers consumer and commercial banking. The bank serves clients primarily through the internet mobile banking, but it also has branches and ATMs in New York, Louisiana, Texas, Maryland, Virginia, New Jersey, and the District of Columbia. Given the physical locations are concentrated in the east coast, as an investor I would want to know how much of the company’s revenue and earnings comes from that region. I would also want to have a better understanding of how much revenue comes from credit cards versus the consumer and commercial banking segments.

While the financial business is not as exciting as many high-flying tech companies, the valuations should provide investors with some enthusiasm. The current Price/Earnings Ratio is 12.96, while the industry average is 13.68. Price/Sales of 1.67 looks favorable compared to the industry average of 3.48. Price/Tangible Book value of 1.26 is also below the industry average of 1.66 and Price/Cash Flow of 10.73 provides a good value against an industry average of 23.44.

Capital One pays a small dividend of 1.73% and it uses just 16.87% of earnings to pay out that dividend. We would not be surprised to see that dividend increase given the low yield and payout ratio.

Over the last 12 months, COF has seen strong sales growth of 10.6%. During the same time frame, EPS has lagged sales growth and has only seen growth of 1.7%. It is important to understand why the company’s top line growth hasn’t converted into similar bottom line growth.

Turning to the balance sheet, the company does not have a current ratio and Debt/Equity is 92.3%. Financial companies produce different looking balance sheets as loans are considered assets and deposits are liabilities. Before investing in this company, it is important to spend some time analyzing the balance sheet to make sure you are not investing in a risky financial company. Based on the preliminary research the company looks to be fundamentally strong, but further research would be required.

Looking forward to December 2018 and using a forward multiple of 16.5 on estimated GAAP EPS of $8.59 gives us a target sell price of $141.74. This is well above the current price of $92.43. Given the fact that market valuations are currently stretched, Capital One Financial could be a great company to further research.

Do you have a question or a company you would like us to take a look at?
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