Capital One’s stock (NYSE: COF) has lost 4% YTD, as compared to the 8% increase in the S&P500 over the same period. Further, at its current price of $89 per share, the stock is trading 19% below its fair value of $110 – Trefis’ estimate for Capital One’s valuation. The company missed the consensus estimates in the first quarter of 2023, despite a 9% y-o-y increase in revenue to $8.9 billion. The revenues benefited from a 12% rise in the net interest income, partially offset by a 3% drop in the noninterest revenues. The NII benefited from a higher net interest margin and an increase in the outstanding loan balance. On the cost front, the provisions for credit losses witnessed an unfavorable build-up from $677 million to $2.8 billion. This coupled with a 9% rise in non-interest expenses, led to a 62% decline in the adjusted net income to $887 million.
The top line improved 13% y-o-y to $34.3 billion in FY 2022, driven by a 12% rise in the net interest income and a 14% growth in the non-interest revenues. It was partly due to higher interest rates and loan growth, and partly because of a recovery in consumer spending. That said, the provisions figure rose from -$1.9 billion to $5.8 billion. Further, the non-operating expenses increased by 16% in the year. Overall, it resulted in a net loss of 41% despite positive revenue growth.
Moving forward, we estimate Capital One revenues to touch $36.9 billion in FY2023. Additionally, COF’s net income margin is likely to reduce from 20.6% to 11.9% in the year, leading to an adjusted net income of $4.4 billion and an annual GAAP EPS of $11.94. This coupled with a P/E multiple of just above 9x will lead to a valuation of $110.
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