Capital One To Deliver Mixed Results In Q1?

Capital One (NYSE: COF) is scheduled to report its Q1 2021 results on Tuesday, April 27 (after the market closes). We expect Capital One to beat consensus estimates for revenues, although earnings are likely to come in below expectations. The credit card giant surpassed the consensus estimates for revenues and earnings in each of the last two quarters. However, its net interest income – which contributes roughly 80% of its top line – suffered in 2020 due to the low interest-rate environment and the drop in consumer spending levels. The impact was also felt on card purchase volumes, which deteriorated for the year – hurting interchange fees. That said, consumer spending levels have seen some improvement over recent months. Further, COF has decreased its provisions for loan losses over the last two quarters on a sequential basis, boosting its profitability figures. We expect the same trend to govern the first-quarter FY2021 results as well.

Our forecast indicates that Capital One’s valuation is around $126 per share, which is 8% below the current market price of around $136. Our interactive dashboard analysis on Capital One’s pre-earnings has additional details.

(1) Revenues expected to beat consensus estimates in Q1

Trefis estimates Capital One’s fiscal Q1 2021 revenues to be around $7.18 billion, 3% above the $6.98 billion consensus estimate. Capital one is heavily dependent on net interest income, which reduced 2% y-o-y in 2020. It could be attributed to the low interest rate environment which decreased the yields on average earning assets even as an increase in deposit balances resulted in higher interest expenses. Further, the drop in consumer spending levels due to the economic slowdown negatively affected the outstanding loans and card purchase volumes. Despite the above factors, Capital one managed to report total revenues of $28.5 billion for the full year 2020 – only marginally lower than the 2019 figure, due to an unrealized valuation gain of $535 million on equity investment in Snowflake Inc.

Consumer spending levels have seen some recovery over the recent quarters. We expect low interest rates and a slight improvement in the spending levels to drive the first-quarter results of FY2021. Further, interest rates are unlikely to see an immediate revival to pre-Covid-19 levels, with the Fed maintaining its benchmark rate near zero. However, we expect consumer spending levels to continue their upward trajectory over subsequent quarters with expected improvement in the economic conditions. This is likely to enable the company’s top-line to touch $29 billion in FY2021. Our dashboard on Capital One’s revenues offers more details on the company’s segments.

2) EPS likely to miss consensus estimates

Capital One’s Q1 2021 adjusted earnings per share is expected to be $3.65 per Trefis analysis, almost 13% below the consensus estimate of $4.17. The company’s profitability figures reduced significantly in 2020 – adjusted net income decreased 54% y-o-y to $2.4 billion, resulting in an EPS of $5.18 for the year. A sizable build-up mainly drove it in provisions for loan losses from $6.2 billion to $10.3 billion (up 65% y-o-y). The company has a loan portfolio of around $253 billion (as per 2020 figures) comprising consumer, commercial, and credit card loans. It increased its provisions to compensate for its customers’ deteriorating loan repayment capability due to the Covid-19 crisis. That said, the company has reduced its provisions over the last two quarters, signaling some recovery in the loan repayment capability of its customers. We expect the same trend to continue in the FY2021 Q1 results.

The loan repayment capability is directly linked to the economic recovery. As economic conditions improve, it will likely result in a favorable drop in provisions for loan losses – boosting Capital One’s profitability. Overall, it will enable COF to report an EPS of around $11.92 in FY2021.

(3) Stock price estimate 8% lower than the current market price

Going by our Capital One’s valuation, with an EPS estimate of around $11.92 and a P/E multiple of just below 11x in fiscal 2021, this translates into a price of $126, which is 8% below the current market price of around $136.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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