Investment Analysis By: Devopama Pant, Qiao Du, Tianlin Fu
Date of Presentation: 11/18/2014
Macroeconomic and Industry Overview
Post great recession in 2008, decreasing unemployment rate coupled with increasing consumer confidence and spending, is continuing to generate incremental receivables for lending companies. Delinquency rates and charge-off rates are at a historical low in last 20 years which would result in lower credit losses for these companies. On the other hand, interest rates which were artificially lowered post-recession, are supposed to go up as QE came to an end in October 2014. This will likely increase the borrowing costs for the lending companies. Also banks and other lending institutions continue to face a higher level of scrutiny and may also be exposed to newer regulations.
Company Overview
Capital One Finance is a U.S. based bank holding company, specializing in credit cards, auto loans, retail banking and mortgages. This is a Fortune 500 company with a strong sub-prime customer-base. It’s headquarter is in McLean,VA. Company has been aggressive in mergers and acquisitions in past few years, as is evident by their acquisition of ING banking services in 2011 and HSBC card services in 2012. The finance firm is very well known in the market for its experimental financial products and competitive credit card products. The company has a strong presence in the credit card market and is expanding its mortgage and auto loan segments rapidly.
Financial Analysis and Valuation
Capital One Finance’s Tier1, Tier2 and Leverage Ratios show steady growth in company’s capital structure and strong Price to Book Ratio favors investors. The Multiple analysis of Capital One with Bank of America, American Express, Citi Group, JPM Chase results in a stock price of $103.58, which is well above the current market price of $81.14. For financial valuation, Dividend Discount Method is used, which takes into account the Dividends of the company for an accurate consideration of the reinvestments of the company. The valuation results in $92.86 which is again more than the market price suggesting the stock is underpriced and hence it is a clear buy signal for the investor. Our results are also in line with the recommendation from a few intuitional analysts that indicate a similar future price.
Recommendation
Hence we concluded our investment analysis by suggesting buying 100 shares of Capital One Finance at market price.