Capital One Financial Corp (NYSE: COF)
TO:RCMP Client
FROM:Anthony Sorrentino, Ryan Seong, Amy Shu, Antonia Wang
DATE:March 29, 2017
SUBJECT:Capital One Financial Corp Recommendation – Buy 100 Shares at Market
Current Price$82.13 / P/E
11.9 / Dividend (Yield)
$1.60 (1.91%) / Market Cap
$39.5B / Book Value
$47.5B
Company Overview
Capital One Financial Corp (COF) was founded in 1993 and operates in three key business sectors: credit card services, commercial banking, and automobile financing. The company was founded as a credit card bank, which represents 60% of the business, then diversified into commercial banking and automobile financing through a series of acquisitions.
Current Position
We purchased 100 shares of COF on the 9th of December, 2013 at a market price of $73.13. Since then, we have received dividend payments totaling $4.70 per share. Since purchasing the stock we have recognized a holding period return of 18.7% including unrealized gains from price appreciation, amounting to an annual rate of return of 5.4%.
Industry Overview
The mature credit card industry is expected to experience growth in future years because of the improving economy, increase in e-commerce, and anticipation of higher interest rates. The trend of rising per capita disposable income and aggregate household debt increase the demand and utilization of credit cards. E-commerce will move transactions away from traditional cash and check methods to credit payments. In addition, rising interest rates will widen margins on interest profitfor companies in the industry.
Valuations
We used two valuation methods for valuing COF, a residual income model as well as a comparable company valuation. In the residual income model, we used a long-term growth rate of 2.0%, a cost of equity of 8.9% and a discount rate of 11.0% which we feel accurately represents the risks of holding Capital One. We forecasted modest growth in their credit card and retail banking businesses, along with slowing increasing interest margins as interest rates continue to rise in the future. With these assumptions, we came up with a residual income valuation of $95.23. For the comparable company valuation, we focused on 5 companies that are similar to COF in either credit card issuing or retail banking. With the use of multiples such as P/E, P/BV, P/TBV and Forward P/E, we came up with a valuation based on similar companies in the market of $101.34.
Recommendation
After assessing the strengths and weaknesses of COF, analyzing industry and macroeconomic factors, and completing two valuations of the company, we suggest buying 100 shares of COF at the prevailing market price. We believe that COF is well positioned in its industry with the quality of loans in its portfolio, adequate capital base and strong management team to take advantage of future opportunities as they arise.