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Yahoo
6 days ago
- Business
- Yahoo
COF Stock Tanks 5.9% Post Discover Merger: A Good Buying Opportunity?
Shares of Capital One Financial Corporation COF have lost 5.9% since the completion of the acquisition of Discover Financial Services on May 18. The $35-billion deal reshapes the landscape of the credit card industry, creating a behemoth (in terms of loan volume).Under the terms of the agreement, Discover Financial shareholders received 1.0192 Capital One shares for each Discover Financial share. Now, the company is well-positioned to capture a bigger share of spending on cards and compete with well-known card issuers. Also, it now has control of Discover's payments network—one of only four in the United States. This will enable it to generate greater revenues from interchange fees and offer independence from the Visa-Mastercard the time of the announcement (February 2024), it was noted that the Capital One-Discover merger will likely deliver attractive accretion and returns for shareholders. Expense synergies of $1.5 billion in 2027, coupled with network synergies of $1.2 billion, underscore the value-creation potential of the merger. The transaction will result in a more than 15% accretion to adjusted non-GAAP EPS by the years, COF has pursued a strategic acquisition strategy to diversify its offerings and expand its market presence. Some of the notable ones are ING Direct USA, HSBC's U.S. Credit Card Portfolio and TripleTree. These acquisitions have been instrumental in transforming the company from a monoline credit card issuer into a diversified financial services firm with a significant presence in retail banking, commercial lending and digital banking is this a good time to capitalize on the dip and add Capital One stock to your portfolio? Let's find out. Relatively Higher Rates: The Federal Reserve has kept interest rates unchanged because of tariff policy concerns. This will likely support COF's net interest income ('NII') and net interest margin ('NIM'). Capital One's NII recorded a compound annual growth rate (CAGR) of 6% over the five years ended 2024. Also, NIM expanded to 6.88% in 2024 from 6.63% in 2023. The momentum continued for NII and NIM in the first quarter of 2025. Though the company's revenues declined marginally in 2020, the metric witnessed a five-year (2019-2024) CAGR of 6.5%. In the same time frame, net loans held for investment recorded a CAGR of 4.3%. The uptrend continued for revenues and loans during the first three months of 2025. Quarterly Revenue Trend Image Source: Zacks Investment Research Rising demand for credit card loans and online banking businesses will aid both NII and NIM. Additionally, Capital One plans to continue to offer Discover credit card products as Discover-branded cards as well as the other consumer cards currently offered by Capital One. This will solidify its presence in an intensely competitive environment. COF has been demonstrating an improvement in the Domestic Credit Card division, which accounted for 95.6% of Credit Card net revenues in the first quarter of Capital One's "Digital First" banking model, characterized by its iconic customer experience and fee-free offerings, will be bolstered by Discover Financial's national direct savings bank. This synergy will increase the combined company's ability to compete with the nation's largest banks while accelerating national banking growth. Sales Estimates Image Source: Zacks Investment Research Solid Balance Sheet: As of March 31, 2025, Capital One had a total debt (securitized debt obligations plus other debt) of $41.8 billion. The total cash and cash equivalents balance was $48.6 the company maintains investment-grade long-term senior debt ratings of Baa1, BBB, and A- from Moody's Investor Service, the Standard and Poor's and Fitch Ratings, respectively. This renders the company favorable access to the debt market. Thus, given its decent earnings strength and a solid liquidity position, COF will likely be able to address debt obligations in the near term, even if the economic situation as of March 31, 2025, Capital One's common equity tier 1 ratio and the total capital ratio of 13.6% and 17%, respectively, were well above the regulatory requirements. Further, the company has an average liquidity coverage ratio of 152%. Average Liquidity Coverage Ratio Image Source: Capital One Financial Corp. Capital One's focus on maintaining strong capital and balance sheet positions supports its capital distribution July 2021, the company hiked its dividend by 50% to 60 cents per share and has maintained the same level since then. The bank hiked dividends thrice during the last five years, with a dividend payout ratio of 16%. Dividend Yield Image Source: Zacks Investment Research Similarly, its close peer Ally Financial ALLY and OneMain Holdings, Inc. OMF increased their dividends twice and seven times over the past five years, One has a share repurchase plan. As of March 31, 2025, roughly $3.88 billion worth of shares remained available for repurchase under the authorization. Over the past week, the Zacks Consensus Estimate for 2025 earnings of $14.77 has moved down 3.1%, while the same for 2026 earnings has moved 1.4% upward to $18.49 per share. Estimate Revision Trend Image Source: Zacks Investment Research The projected figures imply a rise of 5.8% and 25.2% for 2025 and 2026, respectively. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.) COF stock has risen 35.5%, outperforming its close peers — Ally Financial and OneMain — over the past year. Further, it has outperformed the industry, Zacks Finance Sector and the S&P 500 index over the same time frame. Capital One's One-Year Price Performance Image Source: Zacks Investment Research Capital One is well-positioned to capitalize on the Discover Financial acquisition and expand its presence in the growing credit card market. Its revenue diversification efforts, relatively higher interest rates, and a solid balance sheet will continue to support its financials. Moreover, analysts remain optimistic regarding COF's long-term prospects despite near-term steadily rising expenses are a headwind. The company recorded a five-year CAGR of 6.8% (ended 2024) in non-interest expenses, mainly due to higher marketing costs and inflationary pressures. The uptrend persisted during the first quarter of 2025. Expenses are expected to remain elevated in the near term due to ongoing technological investments, integration of Discover Financial and high inflation. Deteriorating asset quality is another concern. Capital One's provisions and net charge-offs (NCOs) recorded a CAGR of 13.4% and 11.4% over the five years ended 2024. Though the trend reversed for provisions during the first three months of 2025, NCOs continued to rise. Amid a challenging macroeconomic backdrop and the Discover Financial merger, provision and NCOs are likely to remain terms of valuation, COF's price-to-book ratio (P/B) of 1.11X is higher than the industry's 0.71X. Thus, the stock is trading at a premium. This suggests that investors may be paying a higher price relative to the company's expected earnings growth. P/B Ratio Image Source: Zacks Investment Research Meanwhile, its peers Ally Financial and OneMain have a P/B ratio of 0.87X and 1.82X, respectively. This indicates Ally Financial is trading at a discount while OneMain is overvalued relative to Capital Capital One might be allocating capital inefficiently. This is demonstrated by the company's return on equity (ROE) of 9.63% compared with the industry's ROE of 9.78%. ROE Image Source: Zacks Investment Research Thus, investors should watch out for these concerns and also monitor how Capital One integrates the Discover acquisition into its businesses before making any investment decision. Those who already own the stock can hold on to it for robust long-term COF carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Capital One Financial Corporation (COF) : Free Stock Analysis Report Ally Financial Inc. (ALLY) : Free Stock Analysis Report OneMain Holdings, Inc. (OMF) : Free Stock Analysis Report This article originally published on Zacks Investment Research ( Zacks Investment Research Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
20-05-2025
- Business
- Yahoo
Capital One's stock looks like a bargain following Discover acquisition
Capital One Financial Corp. announced Sunday it had completed its acquisition of Discover Financial Services, ending a long regulatory approval process after announcing the merger agreement in February 2024. Through Friday, Capital One's COF stock had returned 10.9% for 2025, while Discover shares had returned 16% as investors became more confident the deal would be completed. The KBW Bank Index had returned 2.8% so far this year. Those figures include reinvested dividends. My father's widow keeps sending me $200 checks in the mail. Why would she do this? My ex-wife said she should have been compensated for working part time during our marriage. Do I owe her? 'I'm an idiot': I'm middle aged, earn $68,000 a year and have $39,000 in credit-card debt This Morgan Stanley investor warns of three big disconnects with stocks on the verge of a bull market Recession indicators are out of control. When will this madness end? Investors might be wondering whether or not the postmerger Capital One is now fully valued. In a note to clients on Sunday, Keefe, Bruyette & Woods analyst Sanjay Sakhrani rolled out his firm's 2027 earnings-per-share estimate of $22.42 for the postmerger Capital One. Capital One's stock closed at $197.22 on Friday. So if we use KBW's 2027 EPS estimate, Capital One would be trading at a price-to-earnings ratio of 8.8 — a low valuation, as you can see from the table below. Forward price-to-earnings ratios are typically based on consensus earnings estimates for the following 12 months among analysts working for brokerage or research firms. But Capital One will go through a transition as it integrates Discover. This will shift Capital One more toward credit-card lending. Card loans made up 49% of the bank's average loans held for investment during the first quarter. And along with Discover's card loan portfolio, Capital One now owns Discover's payment-processing network, which handles Discover-branded card transactions. American Express Co. AXP also has its own processing system. Based on their March 31 financial reports, the combined Capital One and Discover had $638 billion in total assets, ranking eighth among the largest U.S. bank holding companies. So here are the largest 20 U.S. banks, with two P/E ratios — the customary forward P/E using the consensus estimates among analysts polled by FactSet for the next 12 months, which is marked 'NTM,' and one based on consensus 2027 EPS estimates. Largest 20 U.S. banks Ticker City Forward P/E – NTM Price/ consensus 2027 EPS estimate Total assets ($bil) JPMorgan Chase & Co. JPM New York 14.7 12.6 $4,358 Bank of America Corp. BAC Charlotte, N.C. 12.0 9.3 $3,349 Citigroup Inc. C New York 9.9 6.6 $2,572 Wells Fargo & Co. WFC San Francisco 13.0 9.9 $1,950 Goldman Sachs Group Inc. GS New York 13.9 11.2 $1,766 Morgan Stanley MS New York 15.5 13.1 $1,300 U.S. Bancorp USB Minneapolis 10.2 8.5 $676 Capital One Financial Corp. COF McLean, Va. 11.7 9.1 $638 PNC Financial Services Group Inc. PNC Pittsburgh 11.5 9.3 $555 Truist Financial Corp. TFC Charlotte, N.C. 10.2 8.4 $536 Charles Schwab Corp. SCHW Westlake, Texas 20.0 14.9 $463 Bank of New York Mellon Corp. BK New York 13.2 10.8 $441 State Street Corp. STT Boston 10.3 8.4 $373 American Express Co. AXP New York 19.2 15.0 $282 Citizens Financial Group Inc. CFG Providence, R.I. 10.5 6.8 $220 Fifth Third Bancorp FITB Cincinnati 10.8 8.9 $213 M&T Bank Corp. MTB Buffalo, N.Y. 11.3 9.1 $210 Huntington Bancshares Inc. HBAN Columbus, Ohio 11.1 9.2 $210 Ally Financial Inc. ALLY Detroit 9.0 6.0 $193 KeyCorp KEY Cleveland 11.2 8.7 $189 Source: FactSet The average forward P/E ratio for these 20 banks is 12.5, while the average P/E based on Friday's closing prices and consensus 2027 EPS estimates is 9.8. Capital One trades at a forward P/E of 11.7 and at 9.1 times the consensus 2027 EPS estimates, which is slightly above the 8.8 valuation based on KBW's 2027 EPS estimate. To add some more perspective to the valuations, the S&P 500's forward P/E valuation is 21.6, based on consensus 12-month EPS estimates weighted by market capitalization. Over the past 20 years, the index's average forward P/E has been 16.6, according to FactSet. For the banking-industry group within the S&P 500 SPX, the current forward P/E is a weighted 12.2, and the 20-year average has been 11.5, according to FactSet. The banks currently trade for 56% the valuation of the full S&P 500, while they have traded at an average valuation of 69% over the past 20 years. So the banks appear relatively inexpensive — and Capital One even more so. 'With shares trading at a material discount to bank peers on average, we believe COF warrants a more in-line multiple given the potential for higher levels of capital return, asset diversification, and deposit funding similar to regional banks, and leverage to a rising interest rate environment,' Sakhrani wrote. The analyst called his 2027 EPS of $22.42 his 'base case' for Capital One but added that there was '$30 of potential EPS power' that year depending on cost synergies, 'normalization' of credit quality for the Discover card portfolio to its pre-2020 state and a reduction of the share count through stock buybacks. The consensus price target for Capital One among analysts polled by FactSet was $216.32 before the open on Monday. Wall Street analysts typically set 12-month targets. The target was 10% higher than Capital One's closing price on Friday. But in this case, 12 months might be too short a period for long-term investors. Sakhrani called the merger 'a transformative deal that will benefit shareholders for the next several years.' He added: 'There remains significant upside potential of around 15%-50%.' Don't miss: These $5,000 bonds can help you fix a stock-heavy portfolio 'He's lied to us all': My father is leaving my sister, brother and me a $450K lakefront property. We want to cut my feckless brother out. I'm 57 and ready to retire next year on $7,500 a month, but my wife says no. Who's right? My wife and I paid off my stepdaughter's $415K mortgage in exchange for her house, but it's now worth $310K. Should we sue? My husband and I spend more money on our daughter and her family than on my single son. Do we compensate him? Stock futures, dollar fall after Moody's strips U.S. of its top credit rating Sign in to access your portfolio
Yahoo
20-05-2025
- Business
- Yahoo
Capital One Acquires Discover, Reshapes U.S. Credit Card Industry
After almost 15 months of announcing an agreement to acquire Discover Financial Services, Capital One COF has finalized the takeover. The $35-billion transaction reshapes the landscape of the credit card industry, creating a behemoth (in terms of loan volume).With the deal completion, Capital One is well-placed to capture a bigger share of spending on cards and compete with well-known card issuers – Visa V and Mastercard MA. Further, the company now has control of Discover's payments network—one of only four in the United States. This will enable it to generate greater revenues from interchange fees and offer independence from the Visa-Mastercard path to completion was far from smooth. While Capital One and Discover shareholders approved the transaction in February, the deal underwent extensive regulatory scrutiny. Final approval came last month from the Federal Reserve and the Office of the Comptroller of the Currency, after the U.S. Department of Justice opted not to challenge the the green light came with conditions: Capital One must address outstanding enforcement issues tied to Discover. In 2023, Discover revealed that it had overcharged merchants on certain credit card transactions since 2007—a disclosure that drew regulatory attention and required corrective One's acquisition of Discover signals a new era in consumer finance, potentially reshaping competition and innovation across the credit card and payments landscape. Under the terms of the agreement, Discover shareholders received 1.0192 Capital One shares for each Discover share. Also, three members from Discover's board of directors – Thomas G. Maheras, Michael Shepherd and Jennifer L. Wong – have joined Capital the time of the announcement (February 2024), it was noted that the Capital One-Discover merger will likely generate and deliver attractive accretion and returns for shareholders. Expense synergies of $1.5 billion in 2027, coupled with network synergies of $1.2 billion, underscore the value-creation potential of the merger. The transaction will result in a more than 15% accretion to adjusted non-GAAP EPS by transaction will also bolster Capital One's balance sheet. On a pro forma basis, the combined entity would have a CET1 ratio of roughly 14% at closing. At present, there will be no change to the Capital One and Discover customer accounts and banking relationships. All the customers will be provided with comprehensive information in advance of any changes. Additionally, Capital One plans to continue to offer Discover credit card products as Discover-branded cards as well as the other consumer cards currently offered by Capital One. Capital One's "Digital First" banking model, characterized by its iconic customer experience and fee-free offerings, will be bolstered by Discover Financial's national direct savings bank. This synergy will increase the combined company's ability to compete with the nation's largest banks while accelerating national banking the years, COF has pursued a strategic acquisition strategy to diversify its offerings and expand its market presence. Some of the notable ones are ING Direct USA, HSBC's U.S. Credit Card Portfolio and TripleTree. These acquisitions have been instrumental in transforming the company from a monoline credit card issuer into a diversified financial services firm with a significant presence in retail banking, commercial lending and digital banking the past year, shares of Capital One have rallied 40.3%, outperforming the industry's growth of 39%. Image Source: Zacks Investment Research At present, COF carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Mastercard Incorporated (MA) : Free Stock Analysis Report Visa Inc. (V) : Free Stock Analysis Report Capital One Financial Corporation (COF) : Free Stock Analysis Report This article originally published on Zacks Investment Research ( Zacks Investment Research Sign in to access your portfolio
Business Wire
18-05-2025
- Business
- Business Wire
Capital One Completes Acquisition of Discover
MCLEAN, Va.--(BUSINESS WIRE)--Capital One Financial Corporation (NYSE: COF) today announced that it has completed its acquisition of Discover Financial Services. 'This deal brings together two innovative, mission-driven companies that together are poised to deliver breakthrough products and experiences to consumers, businesses, and merchants,' said Richard D. Fairbank, Founder and CEO of Capital One. 'I am particularly grateful for the leadership and partnership of Discover's Board of Directors, its Executive Management Committee, and interim CEO Michael Shepherd. Their advocacy for Discover and its customers, and our shared commitment to a successful closing were instrumental in achieving today's milestone. Through the efforts of thousands of associates across Capital One and Discover, we are well-positioned to continue our quest to change banking for good for millions of customers,' added Fairbank. Capital One announced on February 19, 2024, that it had entered into a definitive agreement to acquire Discover. The acquisition was approved by the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency on April 18, 2025, and by the Delaware State Bank Commissioner on December 18, 2024. Stockholders of Capital One and Discover voted in favor of the deal on February 18, 2025. In connection with the acquisition, Capital One expanded its Board of Directors from 12 to 15 and appointed Thomas G. Maheras, Michael Shepherd, and Jennifer L. Wong, each a member of Discover's former Board of Directors, to serve on the Capital One Board of Directors. At this time, Capital One and Discover customer accounts and banking relationships remain unchanged. Customers will be provided with comprehensive information in advance of any forthcoming changes. Until then, customers do not need to take any action and will continue to be served through their respective Capital One and Discover customer tools and channels. Capital One intends to continue to offer Discover credit card products as Discover-branded cards alongside the other consumer cards currently offered by Capital One. The Discover®, PULSE®, and Diners Club International® networks will join our suite of offerings. Investing in our Communities Capital One is committed to investing in our local communities and expanding economic and financial opportunity. Implementation of Capital One's historic, $265 billion Community Benefits Plan, developed in connection with the acquisition and in partnership with leading community organizations, will also now begin, mobilizing funding and support to advance lending, investment, and services to strengthen economic opportunity and financial well-being across America. Advisors Wachtell, Lipton, Rosen & Katz served as legal advisor, Cleary Gottlieb served as co-antitrust legal advisor, and Centerview Partners LLC served as financial advisor to Capital One. Sullivan & Cromwell LLP served as legal advisor and PJT Partners and Morgan Stanley & Co. LLC served as financial advisors to Discover. Further information on Capital One's acquisition of Discover can be found at About Capital One Capital One Financial Corporation ( is a financial holding company which, along with its subsidiaries, had $367.5 billion in deposits and $493.6 billion in total assets as of March 31, 2025. Headquartered in McLean, Virginia, Capital One offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients through a variety of channels. Capital One, N.A. has branches and Cafés located primarily in New York, Louisiana, Texas, Maryland, Virginia and the District of Columbia. A Fortune 500 company, Capital One trades on the New York Stock Exchange under the symbol 'COF' and is included in the S&P 100 index. Additional information about Capital One can be found at Capital One About at Forward-Looking Statements Information in this communication, other than statements of historical facts, may constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include, but are not limited to, statements related to the expected benefits of the transaction. Forward-looking statements may be identified by terminology such as 'may,' 'will,' 'should,' 'targets,' 'scheduled,' 'plans,' 'intends,' 'goal,' 'anticipates,' 'expects,' 'believes,' 'forecasts,' 'outlook,' 'estimates,' 'potential,' or 'continue' or negatives of such terms or other comparable terminology. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Capital One to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, among others, risks relating to the transaction, including the risk that the cost savings and any revenue synergies and other anticipated benefits from the transaction may not be fully realized or may take longer than anticipated to be realized, and the risk that the integration of Discover's business and operations into Capital One will be materially delayed or will be more costly or difficult than expected. Additional factors that could affect future results of Capital One can be found in Capital One's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, in each case filed with the SEC and available on the SEC's website at Capital One disclaims any obligation and do not intend to update or revise any forward-looking statements contained in this communication, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by federal securities laws.
