Title: What Fueled Capital One's 36% Stock Surge Over the Past Year?
Capital One's (NYSE: COF) shares have seen a significant surge, climbing about 36% since early 2024. This growth outpaces the S&P 500's 22% increase over the same period. American Express, another credit card giant, has outperformed both with its stock rising by over 50%. With that in mind, let's dive into recent developments for COF and examine the outlook.
optimism is evident regarding Capital One's acquisition of Discover Financial. Investors are upbeat that the all-stock deal will get the green light. The Office of the Delaware State Bank Commissioner has already given its approval, clearing a major regulatory hurdle. Federal regulators are the next stop, with the deal projected to close around early 2025. The re-election of Donald Trump could further boost the transaction's progress by potentially relaxing financial regulation and antitrust scrutiny.
The deal presents numerous benefits. Capital One and Discover, both credit card issuers, account for under 20% of consumer credit card balances. Combined, they would become the largest U.S. credit card company by loan volume. Discover's proprietary card network, which charges merchants for credit card transactions, is particularly attractive. Capital One currently relies on Visa and Mastercard, but the deal could provide better negotiation power with the dominant players, lowering costs and potentially shifting business to Discover's network.
Capital One's Q3 results were better than expected, with net earnings of $1.8 billion. However, provisions for credit losses rose 8.7%, as credit card debt, delinquencies, and charge-offs have surged in the U.S., particularly among customers with lower credit ratings. Despite this, Capital One's allowance for credit losses is substantial and should adequately cover losses.
The stock's growth has been volatile, with annual returns considerably more sway than the S&P 500. Returns for the stock were 49% in 2021, -34% in 2022, 44% in 2023, but only 38% in 2024. Trefis' High Quality Portfolio, which outperforms the S&P, offers a smoother ride and has delivered over 91% returns since inception.
We value Capital One stock at around $162 per share, barely below its current market price. Visa stock's situation is another intriguing topic.
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The approval by the Office of the Delaware State Bank Commissioner has raised optimism amongst investors about Capital One's (NYSE: COF) planned acquisition of Discover Financial, as this hurdle has been cleared. With the deal projected to close around early 2025, Capital One's cof revenue could potentially benefit from improved negotiation power with dominant players like Visa and Mastercard, due to Discover's proprietary card network.
