Capital One (COF) climbs as investors buy into the Discover vision
Capital One’s shares saw a rise on Tuesday evening, despite a noisy second-quarter result due to the Discover integration. The company reported a 31% increase in revenue to $12.5 billion, missing the consensus estimate but exceeding expectations in adjusted earnings per share at $5.48. Shares were up about 3% in extended trading, reaching around $224 per share, potentially marking a new all-time high if it closes above $220.91 on Wednesday.
The Discover acquisition, which closed on May 18, resulted in various accounting treatments that led to mixed analyst estimates. Capital One reported a net loss of $4.3 billion based on GAAP, but a significant profit of $5.48 per share on an adjusted basis. The acquisition also required an $8.8 billion initial allowance build for Discover’s non-purchased credit deteriorated loans, impacting the reported provision for credit losses.
Despite the challenges in evaluating the quarter, the long-term benefits of owning Discover are promising. The acquisition is seen as transformative, with strategic advantages and financial benefits. The integration of Discover’s network is expected to boost Capital One’s earnings power and expand its price-to-earnings multiple. The company remains undervalued, with potential for sustainable growth in the coming years.
Management highlighted the progress of the Discover integration on the earnings call, noting that the integration is off to a great start. Although integration costs are expected to be somewhat higher than initially projected, the company is focused on achieving synergies and strengthening its position in the payments industry. Capital One aims to invest in the Discover network to enhance international acceptance and attract higher spenders.
Analysts are still fine-tuning their models for the combined company, resulting in varied expectations and evaluations. The bearish view on Capital One suggests that economic uncertainties could impact the company’s credit performance. However, Capital One’s credit metrics have been healthy and improving, indicating resilience in challenging economic conditions.
Overall, Capital One’s outlook remains positive, with a focus on sustained growth and value creation. The company’s commitment to investment and integration efforts is expected to drive long-term success. With a buy-equivalent rating and a price target of $250, Capital One’s potential for future growth and profitability is promising.
