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What's in Store for Capital One (COF) This Earnings Season?

Zacks Equity Research

Capital One COF is slated to release fourth quarter and 2018 results on Jan 22, after market close. Its quarterly earnings and revenues are projected to grow year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from stable revenues and lower provisions. However, increase in operating expenses was the undermining factor.

Capital One has an impressive earnings surprise history. Its earnings have surpassed estimates in three of the trailing four quarters, the average positive surprise being 8.3%.

Capital One Financial Corporation Price and EPS Surprise

 

Capital One Financial Corporation Price and EPS Surprise | Capital One Financial Corporation Quote

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Nonetheless, the company’s activities in the fourth quarter were not enough to win analysts’ confidence. As a result, the Zacks Consensus Estimate for earnings of $2.40 moved 2.4% downward over the past seven days. Nevertheless, the figure represents year-over-year growth of 44.6%.

Also, the consensus estimate for revenues of $7.07 billion reflects a 0.8% rise from the prior-year quarter.

Factors to Influence Q4 Results

Improvement in net interest income (NII): Per the Fed’s latest data, consumer loans recorded decent growth. This along with Capital One’s efforts to further strengthen its card operations and higher interest rates will support NII to some extent. However, flattening of the yield curve and higher deposit betas are likely to slightly hamper growth.

Modest fee income growth: Capital One is expected to record an increase in fee income in the to-be-reported quarter. As the quarter is likely to show increased card usage, interchange fees (major part of its fee income) are expected to rise.

Modest increase in expenses: Operating expenses are expected to trend upward in the to-be-reported quarter. Specifically, marketing expenses will likely remain elevated with rising loan growth opportunities.

Management expects marketing expenses in 2018 to be higher than 2017 with increases expected mostly in the second half of the year. Further, operating efficiency ratio is projected to be roughly flat year over year.

Asset quality to worsen: While improvement in card loans is leading to an increase in interest income, Capital One will continue witnessing a rise in credit card delinquency rates. Also, the charge-off rate in auto finance business will likely increase.

Now, let’s have a look at what our quantitative model predicts:

The chances of Capital One beating the Zacks Consensus Estimate in the fourth quarter are less. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Capital One is -2.62%.

Zacks Rank: Capital One currently has a Zacks Rank #3. This increases the predictive power of ESP but we need to have positive ESP to be sure of an earnings beat.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming release.

Huntington Bancshares Incorporated HBAN is slated to release results on Jan 24. It has an Earnings ESP of +3.97% and a Zacks Rank #3.

Prosperity Bancshares, Inc. PB is slated to announce results on Jan 30. It has an Earnings ESP of +1.11% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ares Capital Corporation ARCC is scheduled to release results on Feb 12. It has an Earnings ESP of +1.10% and carries a Zacks Rank #3.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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