Investment Management Program

Capital One Financial Corp. (NYSE: COF)

10.22.2020

Analyst: Zachary Gibson Email: ZG5956ship.edu Sector: Financial Services Stock Type: Large Value Industry: Credit Services Market Cap: $35.05B

Key Stock Statistics

Dividend Yield .54%

Beta 1.69

Revenue (Million) 27,471

Operating Margin -

Net Income (Million) 251

EPS 1.93

Operating Cash Flow (Million)

16,747

Free Cash Flow (Million) 15,914

Return On Assets -0.03%

Return on Equity -0.21%

P/E 36.36

P/B 0.59

P/S 1.20

P/FCF -

Projected 5 Year Growth 5.34%

Current Price Fair Value 52 Wk Range $76.75 $82.00 $38.00-107.59

Company Overview: Capital One Financial Corporation is a financial service holding company. They provide a wide array of financial services in the United States, United Kingdom, and Canada. Capital One operates through three segments: credit card, consumer banking, and commercial banking. This company was founded in 1988 and its headquartered in McLean, Virginia.

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Contents Executive Summary.............................................................................................................................. 3

Company Description ........................................................................................................................... 3

Business Segments .................................................................................................................................................................... 3

Stock Performance .................................................................................................................................................................... 3

Investment Thesis ................................................................................................................................ 4

Key Fundamentals and Economic Drivers ....................................................................................................................... 4

Financial Ratio Analysis ........................................................................................................................................................... 4

Fair Value and Target Price .................................................................................................................................................... 4

Risks ..................................................................................................................................................... 5

External Risks .............................................................................................................................................................................. 5

Internal Risks ............................................................................................................................................................................... 5

Recommendation ......................................................................................................................................................................... 5

References ........................................................................................................................................... 5

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Executive Summary Capital One Financial Corp. is a firm in the financial services sector, distinctly in the credit services industry. This stock (COF) is traded on the NYSE. Capital One has been negatively affected by the COVID-19 virus in the short term as interest rates have been pushed down to nearly 0.00%. This has and will continue to have adverse effects on revenue due to decreased lending demand. Revenue can be accounted from three branches: credit cards, consumer banking, and commercial banking.

Company Description Capital One Financial Corp. was founded in Richmond, Virginia in 1988 by Richard Fairbank and Nigel Morris under the name of Signet Bank. In 1994 Signet opened a credit card division called OakStone Financial, OakStone was later renamed Capital One. This company initiated to power of mass marketing credit cards during the 90’s. Capital One has grown into 755 branches and over 2,000 ATMs with a total of roughly 52,000 employees, ranking itself number 97 on the Fortune 500 companies and 39 on the Fortune 100 Best Companies to Work For.

Business Segments

Capital One Financial Corp. is in the Financial Services sector, specifically the Credit Services industry, COF derives its revenue from three segments: Credit Card, Consumer Banking, and Commercial Banking. Credit Card As stated above, Capital One started its journey as a credit card company. During this time Capital One’s sole revenue producer was credit cards. As of December 31, 2019 Capital One has $128,236 (million) in credit card loans outstanding. This accounts for 48.24% of their revenue.

Consumer Banking Capital One sought to diversify their revenue with an entrance into the consumer banking industry with the acquisition of Hibernia National Bank in 2005 and North Fork Bank in 2006. The consumer banking segment is made up of the deposit and lending activities for consumers, small businesses, and auto lending. Capital One as of December 31, 2019 has $63,065 (million) in outstanding consumer banking loans, this accounts for 23.73% of revenues. Commercial Banking This sector is made up of lending, deposit collecting, capital markets and treasury management services for commercial real estate and commercial customers. Commercial banking as of December 31, 2019 has a total of $74,508 (million) in outstanding commercial banking loans, accounting for 28.03% of revenues.

Stock Performance

Capital One stock goes along with the long list of stocks negatively affected from the COVID-19 virus. Capital One has a YTD return of -29.30% compared to the YTD return of the Credit Services Industry of 9.24% and the S&P 500 YTD return of 5.57%. Capital One stock pre pandemic was trading roughly $104.00 the lowest point during the turmoil was $42.17, this is a loss of 40.54%.

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Capital One has failed to outperform our benchmark; the S&P 500 since 2017. During this three-year period the Credit Services industry has consistently outperformed the benchmark.

Investment Thesis This section will be an overview of Capital One’s stock. The essential factors influencing Capital One’s stock, financial statement and ratios will be provided. A valuation of Capital One’s stock will be shown through a Gordon Growth model.

Key Fundamentals and Economic Drivers

The next sections will highlight the main factors that affect Capital One. This will include how the financial sector and credit services industry are affected by shifts in the business cycle. Financial Sector The financial sector is made up of firms that provide financial services to commercial and retail customers. This sector issues a wide range of services including banking, investing, insurance, and real estate firms.

As seen above the graph shows how cyclical the financial sector is as it almost mirrors the S&P 500 over the past decade. Historically this sector has varying return depending what stage of the business the economy is in.

This chart shows the financial sector overperforms during the early stage of the business cycle and has no clear patterns for the rest of the stages. Currently the U.S. is in a recession due to the COVID-19 virus. Since this virus hit our country the Federal Reserve has decreased interest rates next to 0%.

Financial Ratio Analysis

Capital One has a -0.03% return on assets, and -.21% return on equity. Negative ROA and ROE means Capital One management is not generating a return with the company’s assets.

Fair Value and Target Price

Capital One’s fair value is valued at $82.00, its one-star

price is $143.50 and five-star price is $41.00. As of

10/28/2020 COF closed at $71.77.

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Risks

External Risks

Capital One faces an array of external risks under the umbrella of instability in the macroeconomic environment. These risks include changes in payment patterns, customer delinquency and default rates could increase, decreased consumer demand for spending and credit with a shift away from finance charges and various other fees. Changes in consumer behavior in the United Kingdom could be set aflame with the U.K.’s exit from the European Union. There is no telling if or how this will affect Capital One, but increased market vitality could cause economic depredation, leading to adverse effects on Capital One’s presence in the United Kingdom. Capital One’s ability to borrow from other financial institutions or funding transactions with promising terms is a large driver for potential profit. Changes in interest rates and other market factors have the potential for negative impacts on Capital one. Short and long-term interest rates have been set below historical averages along with a relatively flat yield curve. This combination has been known to lead to reduced margins resulting in lower revenues. Capital One faces extensive regulations in all segments of its business. Failure to comply with these regulations have the possibility to cause financial, structural, and operational penalties.

Internal Risks

Capital One is faces with operational risk. This includes faults in execution, processes, inaccurate models, faulty technology, fraud, and security. Capital One must maintain adequate operational, technological, and organizational infrastructure to run their business. If unable to do so, their reputation will

be tainted leading to a loss of consumer confidence in the firm. Inaccurate underwriting, Capital One may begin to slip

in their ability to determine the creditworthiness of a

customer, which will lead to credit losses and decreased

returns.

Capital One’s business mix places a higher amount of

consumer loans in their portfolio compared to its

competitors, along with prime and subprime credit card

accounts and auto loans. Capital One may experience a

higher rate of delinquencies, which could lead to

increased credit losses, operating and regulatory

criticism.

Recommendation

I recommend selling Capital One stock.

COF has failed to beat the benchmark since

2017

YTD return of -28%

Holding return of -21.4%

Reduce Financial sector towards the target

weight of 8.5%

Ensure enough cash for the $5,000 scholarship

References https://www.sec.gov/ix?doc=/Archives/edgar/data/9276

28/000092762820000102/cof-

12312019x10k.htm#s31C69CC1D8DF558F991DB33B

CC77C0D8

https://financials.morningstar.com/ratios/r.html?t=0P00

000129&culture=en&platform=sal

https://eresearch.fidelity.com/eresearch/goto/evaluate/s

napshot.jhtml?symbols=COF&type=sq-NavBar

https://finance.yahoo.com/quote/COF?p=COF

http://performance.morningstar.com/stock/performance

-return.action?t=COF&region=usa&culture=en-US

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https://research.ameritrade.com/grid/wwws/research/rep

orts/viewreport?id=2942&documenttag=COF&c_name

=invest_VENDOR

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Appendix A

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Appendix B