Capital One (NYSE: COF) stock has fared well, rising by about 36% since early 2024. This compares to the S&P 500 which remains up by about 22% over the same period. In comparison, the company’s peer in the credit card space, American Express, has seen its stock rise by over 50% over the same period. So what are some of the recent developments for COF stock and what’s the outlook like? As an aside, What Do Tesla’s Cybertruck Woes Mean For Its Stock?
Optimism Surrounding Discover Deal
Investors are increasingly optimistic that COF’s deal to acquire Discover Financial. will sail through. With the all-stock deal, Discover shareholders are set to receive 1.02 shares of Capital One stock for each of their shares. Considering the current market price of about $170 for Discover stock and about $$175 for Capital One stock, the difference indicates a relatively tight spread of about 4.5% below Capital One’s offer, compared to a spread of over 12% when the deal was first announced last February. There are a couple of reasons for this optimism. In December, the Office of the Delaware State Bank Commissioner granted approval for the deal. This is seen as one of the key regulatory hurdles in the all-stock merger. Federal regulators will be the next stop as the deal moves toward closure, which is anticipated to be around early 2025. The re-election of Donald Trump to the U.S. presidency is also expected to help the transaction move forward as the new administration is expected to reduce financial regulation and potentially bring in a softer antitrust climate compared to a Democratic administration. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
There are several benefits that the merged entity could see via a deal. Both Capital One and Discover are banks that issue credit cards and together account for under 20% of consumer credit card balances, which would make them the largest U.S. credit card company by loan volume. The most attractive part of the deal would be Discover’s proprietary card network, which charges merchants a fee for processing credit card transactions. Capital One presently uses Visa and Mastercard, which dominate the card payment network market. The deal could give Capital One better leverage in negotiating prices with the two dominant network players bringing down costs while moving some of its business toward the Discover network. A deal could also give Capital One opportunities to expand and enhance Discover’s merchant network. For instance, Capital One’s strong capabilities in credit card fraud protection and detection could be deployed more widely across the Discover Network. The deal allows Capital One to cross-sell a wide range of financial products including checking and savings accounts, and personal and automotive loans to Discover’s loyal base of cardholders. This could drive up revenues for the combined entity.
Capital One’s Recent Financials, Charge Offs
Capital One posted a better-than-expected set of Q3 results with net earnings coming in at $1.8 billion. This was roughly flat versus last year as the company benefited from rising net interest income and a higher base of loans and deposits, although this was offset by higher provisions as well as lower noninterest-related expenses. The company’s provision for credit losses rose 8.7% from the prior-year quarter to $2.48 billion. The increase comes as credit card debt in the U.S. has surged with charge-offs and delinquencies rising with interest rates also at relatively elevated levels. This has proven a burden, particularly for customers with lower credit ratings, who make up a meaningful portion of Capital One’s customer base. That said, the company’s allowance for credit losses stood at $16.5 billion, exceeding its current net charge-off rate and this should adequately cover its losses. If the economy picks up and interest rates remain at manageable levels, it is possible that credit metrics could get better enabling the company to release some of these reserves and boost its profitability.
The increase in COF stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 49% in 2021, -34% in 2022, 44% in 2023, and 38% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could COF face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?
We value Capital One stock at about $162 per share, slightly below the current market price. See our analysis of Capital One Valuation for a closer look at what’s driving our price estimate for the company. Also, see What’s Happening With Visa Stock?
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