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Why Is Capital One (COF) Down 3.8% Since the Last Earnings Report?

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A month has gone by since the last earnings report for Capital One Financial Corporation (COF - Free Report) . Shares have lost about 3.8% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Capital One Lags Q1 Earnings as Costs Rise

Capital One’s first-quarter 2017 adjusted earnings of $1.75 per share lagged the Zacks Consensus Estimate of $1.93. Also, it compared unfavorably with the year-ago quarter's earnings of $1.84.

Lower-than-expected results were due to a fall in non-interest income, an increase in provisions and rising expenses. Capital and profitability ratios continued to weaken, while credit quality deteriorated. However, higher net interest income and easing margin pressure supported the results to some extent.

After considering an adjustment related to U.K. Payment Protection Insurance customer refund reserve, net income for the quarter came in at $810 million, down from $1 billion in the prior-year quarter.

Rise in Net Interest Income Supported Results

Net revenues were $6.54 billion, up 5% year over year. However, the figure was marginally below the Zacks Consensus Estimate of $6.59 billion.

Net interest income rose 8% from the prior-year quarter to $5.47 billion. Also, net interest margin increased 13 basis points (bps) year over year to 6.88%.

However, non-interest income declined 9% year over year to $1.06 billion. The decrease was mainly due to a fall in service charges and other customer-related fees, and other income.

Non-interest expenses of $3.43 billion increased 7% from the year-ago quarter. All cost components, except amortization of intangibles and marketing expenses, rose year over year.

Efficiency ratio came in at 52.55%, compared with 51.82% recorded in the year-ago quarter. An increase in efficiency ratio indicates lower profitability.

Worsening Credit Quality

Net charge-off rate rose 42 bps year over year to 2.50%. Further, provision for credit losses surged 30% from the year-ago quarter to $1.99 billion.

Also, the 30-plus day performing delinquency rate increased 28 bps year over year to 2.61%. Likewise, allowance, as a percentage of reported loans held for investment was 2.90%, up 52 bps year over year.

Profitability & Capital Ratios Weaken

Return on average assets of 0.90% at the end of the reported quarter was down 33 bps year over year. Also, return on average common equity declined significantly to 6.73% from 8.52% recorded in the prior-year quarter.

As of Mar 31, 2017, Tier 1 risk-based capital ratio decreased to 12% from 12.4% as of Mar 31, 2016. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.4% as of Mar 31, 2017, down from 11.1% as of Mar 31, 2016.

Outlook (excludes the potential impact of the announced Cabela's transaction)

Considering the growth over the last two years, management remains confident about delivering EPS growth in the range of 7–11% for 2017. This is based on expectation of improved efficiency outlook, partly offset by pressure of higher charge-offs and related allowance.

Further, revenues are projected to increase and drive growth in pre-provision earnings.

For 2017, domestic credit card charge-off rate is expected in the in the high 4% to 5% range (up from prior outlook of the mid-4% range), with quarterly variability. Also, credit pressure is expected to continue in oil field service and taxi medallion lending portfolios.

Looking ahead in Consumer Banking segment, the company expects a one-time increase in charge-offs of approximately $30 million due to accounting changes in the timing of charge-offs of bankrupt accounts. For the year, this will increase auto businesses charge-off rate by nearly 20 bps.

In 2017, management projects efficiency ratio (excluding adjusting items) in the 51% plus or minus a reasonable margin of volatility (improving from prior guidance of 52%). Over the longer term, management remains optimistic to derive efficiency improvement driven by growth and digital productivity gains.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to four lower.

VGM Scores

At this time, Capital One's stock has an average score of 'C', on both growth and momentum front. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising.  Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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