Capital One Financial COF A favorite of at least two wise money managers. Warren Buffett’s Berkshire Hathaway added stocks to its positions in the second quarter.In fact, we’re calling Capital One 3 Buffett stocks to buy this quarter. stock also Second largest holding of gold-rated Oakmark fundsmanager Bill Nygren spoke about this in a recent episode. long field of view. Additionally, Morningstar’s Chief US Market Strategist Dave Sekera recommends Capital One as one of the next contenders. 5 financial stocks to buy after earnings.
Capital One maintains a more limited branch network than traditional peer banks. It uses online and mobile channels to acquire customers and serve accounts. A focus on online bank accounts has allowed the company to establish a broader national presence than its traditional narrow branch network. This dynamic allows Capital One to enjoy the benefits of being a large bank without the expense of operating a large bank branch system. Capital One’s biggest driver is credit cards, which account for approximately 44% of total lending. The remaining business consists primarily of commercial loans and auto loans through the consumer banking division. This narrow product line is asset-focused, allowing Capital One to enjoy economies of scale in its chosen line of business, but leaving the bank reliant on credit cards and auto loans.
Capital One Morningstar Key Metrics
Evaluation of the economic moat
We believe Capital One has a lasting competitive advantage and will continue to generate tangible shareholder returns that exceed its cost of capital. The company has invested heavily in technology and marketing, which has allowed it to build a nationwide wealth and deposit base using online bank accounts while maintaining a limited branch network. This has given Capital One the scale it needs to effectively compete in its business area while controlling operating costs. As a result, Capital One now enjoys tangible shareholder returns that comfortably exceed its cost of capital. Banks typically create cost advantages by controlling operating expenses, building a low-cost deposit base, and using effective underwriting to keep credit costs lower than their peers. Capital One has been particularly successful in keeping its business structure lean.
Learn more about Capital One mote ratings here.
Estimated fair value of Capital One stock
Based on our current estimates, our estimated fair value of $146 represents a 2023 price/earnings ratio of 12.9. Our valuation is influenced by net interest margins, growth in credit card receivables and expectations about how well the company manages non-interest expenses. Expected net charge-offs are an important factor, especially for profitable bank credit card loans. The firmwide net charge-off rate is assumed to rise to 2.80% in 2023, 3.68% in 2024, and return to 2.91% by 2026. Despite higher credit losses, Capital One expects current reserves to be more than adequate. The credit loss ratio is just under 4.70% and the Common Equity Tier 1 capital ratio is approximately 12.7%. We expect an efficiency rate of 54.6% by 2027, broadly in line with historical levels.
Learn more about Capital One’s fair value estimates here.
risk and uncertainty
Banks are subject to economic cycles as their profitability is affected by changes in credit quality, interest rates and consumer spending. Capital One’s large subprime consumer loans make it more vulnerable to credit cycles than its peers. About 31% of the company’s credit card receivables and 47% of its auto loans are from borrowers with FICO scores below 660. Negative economic conditions are at risk of higher write-offs from weaker borrowers. The company’s economic exposure increases with the volume of auto financing. Auto loans rely on being able to resell a seized vehicle at a fair price to keep net write-offs low. If economic pressures reduce the value of this collateral, the credit risk of Capital One’s auto loans increases. However, we believe the risk of a material impact on Capital One’s financial condition in the near future is limited.
Learn more about Capital One’s risks and uncertainties here.
Capital One Bulls says
- Capital One’s credit card portfolio is experiencing rapid growth, driving increased net interest margins and earnings.
- Investments in technology, moving away from traditional data centers and reducing the number of branch offices should help the company reduce costs.
- Capital One has expanded its card product offerings by entering the commercial and luxury travel card market.
Capital One’s Bears say
- Credit card rewards continue to grow across the industry, and competition for cardholders remains fierce. This could increase Capital One’s spending and could threaten its credit card earnings.
- Capital One is exposed to a large amount of subprime lending through its credit card and auto lending divisions, and credit costs are expected to rise.
- Capital One competes with online banks for deposits. This increases interest costs as banks need to offer competitive interest rates.
