Bear of the Day: Capital One Financial (COF)

This might be the right credit card for your wallet, but the stock should be strongly re-evaluated if it's in your portfolio. Capital One Financial ( COF - Analyst Report ) slipped to a Zacks #5 Rank (Strong Sell) this week after a continued deluge of downward earnings estimate revisions.

This is happening in the aftermath of a mixed earnings report that took the stock down sharply last month from its 52-week high. The company reported fourth quarter 2012 earnings of $1.41 per share which significantly lagged the Zacks Consensus Estimate of $1.62.

This was a big improvement from the prior-year quarter's 88 cents, but investors and analysts are still looking for the bright spots. Before we look at some of the details of that report, let's take a look at the Zacks Price & Consensus chart which gives us a great visual on which way estimates are headed and if price may soon follow.

Rising Costs, Fees, and Interest Rates

For 2012, Capital One reported earnings of $6.16 per share. This was below the Zacks Consensus Estimate of $6.43 and prior-year earnings of $6.80.

Capital One's net revenues for the reported quarter stood at $5.62 billion, jumping 38.9% year over year. Yet, revenues were below the Zacks Consensus Estimate of $5.78 billion.

Net revenues for 2012 were $21.40 billion, surging 31.4% from $16.28 billion in 2011. Also, revenues were above the Zacks Consensus Estimate of $20.86 billion.

Net interest income for the quarter grew 42.3% from the previous-year quarter to $4.53 billion. However, net interest margin decreased 70 basis points (bps) year over year to 6.52%.

Non-interest income surged 26.3% from $868 million in the prior-year quarter to $1.10 billion in the reported quarter. The increase was mainly driven by higher service charges and other customer-related fees as well as rise in interchange fees.

Capital One's operating expenses rose 24.3% from the prior-year quarter to $3.26 billion. The increase was largely attributable to higher salaries and associate benefits costs and merger-related expenses, partially offset by lower marketing expenses.

Downward Revisions Trend

Below are the tables for analyst estimate moves. This is the nuts and bolts of the big picture lines on the chart above.

If 2012 was a peak, or a significant slow-down, in earnings for COF, we are going to get a good idea of that from these tables.

And if you are a COF investor, it may be a good time do some further research on what's going on inside their business. It's quite possible that analysts see something in rising costs or interest rates, or in the company's credit quality and delinquencies that is driving this new trend of lowered expectations.

Kevin Cook is a Senior Stock Strategist with Zacks.com