Reflecting the companys good credit quality often a

Info icon This preview shows pages 4–6. Sign up to view the full content.

View Full Document Right Arrow Icon
reflecting the company’s good credit quality, often a major swing factor in COF earnings, and the better-than-expected 1Q EPS, we are raising our 2018 estimate to $10.04 from $9.63. First-quarter credit card lending growth and purchase volumes were strong, while the home and commercial segments declined. Management has noted strong opportunities to grow the credit card loan portfolio and generate attractive returns from this business. Meanwhile, net charge-offs have increased only slightly, and, aided, by the recent sale of most taxi medallion loans (where defaults had been growing), we expect loss rates to remain below 2.75% of average loans in 2018. Management believes the peak impact on loss rates from “growth math,” — the upward pressure on delinquencies and charge-offs as new loan balances season and become a larger portion of the overall portfolio — will continue to diminish in 2018. Credit quality has remained healthy across most of the credit card landscape, and we believe that the recent level of loss provisioning, which has been well in excess of net charge-offs, demonstrates good earnings quality. We believe that COF shares are attractively valued at less than 10-times our 2018 EPS estimate, at the low end of their historical range. Our target price of $118 implies potential upside of 27%. RECENT DEVELOPMENTS Over the past year, COF shares have risen about 8%, versus a 10% gain for the broad market. On April 24, Capital One reported adjusted 1Q18 earnings from continuing operations of $2.65 per share, up from $1.75 a year earlier and above the $2.31 consensus. Results in the current period exclude income from discontinued operations and restructuring charges totaling $0.03 per share. Net revenues rose 6% to $6.9 billion. Average loans held for investment grew 3% year-over-year in 1Q18, to $249.7 billion, with growth in the credit card and auto lending businesses partly offset by a drop in commercial, home loans and retail banking. The net interest margin widened to 6.93% from 6.88% a year earlier. Net charge-offs were $1.62 billion (2.59% of average loans), up from $1.51 billion (2.50%) in 1Q17. The provision for credit losses declined 16% to $1.67 billion, as the company added $98 million to reserves. In September 2017, the company acquired the credit card assets of retailer Cabela’s, adding $5.7 billion to loans held for investment. In December 2015, Capital One acquired about $8.5 billion of healthcare-related loans from GE Capital, including GE’s Healthcare Financial Services business, for a 6% premium to the par value of receivables as of June 30, 2015. EARNINGS & GROWTH ANALYSIS We project 5% growth in managed loans in 2018 (versus a prior projection of 7%), equal to 2017. While growth in credit card and auto lending should continue, the home and commercial segments have moved lower, in line with industry trends. With an increasingly indebted consumer, the company is tightening underwriting standards. It has also noted a narrowing of the growth window in credit cards, as well as in auto, where auction prices on used cars have softened.
Image of page 4

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
M ARKET D IGEST - 5 -
Image of page 5
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern