Valuation cof trades at 93 times our eps forecast for

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VALUATION COF trades at 9.3-times our EPS forecast for 2018 – well below the historical average. Peer comparisons are difficult for Capital One because the major U.S. card issuers (Citi, Bank of America, JPMorgan Chase) tend to be global financial services firms whose businesses extend well beyond consumer finance. We believe that COF’s valuation, which is low relative to banks, reflects the company’s historical roots as a credit card lender, with high margins but also inherently higher credit loss rates. COF’s current portfolio is 43% credit card, with auto, home loan and retail banking at 30%. Loss reserve builds continued in 2017 amid rising levels of consumer debt and soft used car prices. However, loss trends have recently moderated, and the company is expected to improve efficiency. As such, we believe that high single-digit EPS growth (before the impact of a lower tax rate) is achievable in 2018. Our target price of $118 implies a modest multiple of 11.8-times our 2018 estimate, still below the historical average, and a favorable PEG ratio of 1.2. On April 25, BUY-rated COF closed at $92.76, down $4.66. (Stephen Biggar, 4/25/18)
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M ARKET D IGEST - 6 - GENERAL DYNAMICS CORP. (NYSE: GD, $214.53) .............................................................. BUY GD: Pullback offers favorable entry point * GD shares have fallen about 6% from their 52-week high in the recent market pullback. * Meanwhile, the company once again topped the consensus EPS estimate in 1Q18, and boosted its dividend by 10.7%. * Management is focused on driving growth through modest sales increases, margin improvement, and share buybacks, and has a history of delivering positive EPS surprises. * Our blended valuation model renders fair value of $250. ANALYSIS INVESTMENT THESIS We are maintaining our BUY rating on General Dynamics Corp. (NYSE: GD) with a target price of $250. General Dynamics’ diversified business mix is attractive compared to those of many peers, as a relatively low 50% of revenue comes from the U.S. government — thus reducing the company’s exposure to the budget debates in Washington. Management is focused on driving growth through modest sales increases, margin improvement, and share buybacks, and has a history of delivering positive EPS surprises. The company is also aggressively returning cash to shareholders through increased dividends. An improvement in the cash conversion ratio as new products come on line could continue to drive the shares higher. The shares are a suitable core holding for a diversified portfolio. RECENT DEVELOPMENTS GD shares have outperformed over the last quarter, declining 5% while the S&P 500 has fallen 7%. The shares have outperformed over the past year, with a gain of 12% compared to an advance of 10.6% for the index. GD has also outperformed the industry ETF IYJ over the past 1-, 5-, and 10-year periods. The beta on GD is 0.81. On April 25, General Dynamics reported 1Q EPS that once again topped the consensus estimate, though growth was not as strong as in previous quarters. Revenue of $7.5 billion rose just 1% from the prior year (versus an 8% increase in 4Q), and the consolidated operating margin declined 70 basis points to 13.4%. EPS from continuing operations rose 7% to $2.65, benefiting
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