Capital One (COF - Free Report) remains well positioned to grow, driven by consistent top-line rise, improving earnings performance and strong balance sheet position. Further, it has an impressive capital deployment plan.
Yet, deteriorating asset quality and higher expense levels are major concerns for Capital One. Despite these headwinds, this Zacks Rank #2 (Buy) stock seems like an attractive investment opportunity right now as it has been witnessing solid upward estimate revisions.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Over the past seven days, the Zacks Consensus Estimate for earnings has increased 1% for the current year. Further, shares of Capital One have rallied 13% over the past year, widely outperforming the industry’s increase of just 0.9%.
What Makes the Stock an Attractive Pick?
Earnings growth: Over the past three to five years, Capital One witnessed earnings per share growth of 2.5% against 1.3% decrease recorded by the industry. Further, the company’s earnings are projected to grow 59.3% in 2018,significantly above the industry average of 30.6%.
Moreover, Capital One has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with an average beat of 9.5%.
The company’s long-term (three-five years) estimated EPS growth rate of 10.7% promises rewards for investors in the long run.
Revenue strength: Capital One continues to benefit from higher interest rates, loan growth and acquisitions. Further, its Credit Card division reflected solid loan growth and purchase volume improvement. These resulted in steady growth in revenues, which grew at a CAGR of 5% over the last five years (ended 2017).
Revenue prospects look encouraging on the back of the company’s solid credit card and online banking businesses. Its projected sales growth rates of 2.6% and 2.4% for 2018, and 2019, respectively, ensure continuation of the upward trend in revenues.
Inorganic growth strategy: Given the strong balance sheet, Capital One has been growing through acquisitions. Some of the major acquisitions done by the company include HSBC Holdings’ (HSBC - Free Report) credit card business, ING Direct USA — the online banking unit of ING Groep N.V. (ING - Free Report) , General Electric’s (GE - Free Report) healthcare unit and Cabela's Incorporated’s credit card operations. Apart from these, the company made several smaller opportunistic buyout deals. These efforts substantially supported Capital One’s prospects.
Stock seems undervalued: Capital One seems undervalued compared with the broader industry. Its current price-earnings (F1) and price-book ratios are lower than the respective industry averages.
Moreover, the stock has a Value Score of A. The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are trading at a discount.
Favorable VGM Score: Capital One has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
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