On Mar 6, 2013, we downgraded
Capital One Financial Corp.
) to Underperform based on the company's lower-than-expected
fourth quarter 2012 results and elevated operating expenses.
Moreover, the company has delivered an average negative surprise
of 15.1% over the past 4 quarters.
Why the Downgrade?
On Jan 17, Capital One's announced its fourth quarter 2012
earnings of $1.41 per share, which substantially lagged the Zacks
Consensus Estimate of $1.62. Further, net revenue for the
reported quarter stood at $5.62 billion, below the Zacks
Consensus Estimate of $5.78 billion.
Estimates over the past 60 days have also been declining with the
Zacks Consensus Estimate for 2013 going down 5.6% to $6.61 per
share. The Zacks Consensus Estimate for 2014 also declined
significantly (down 7.3% to $6.85 per share). With the Zacks
Consensus Estimates for both 2013 and 2014 going down, the
company now has a Zacks Rank #5 (Strong Sell).
Causes of Concern
Increasing operating expenses remain a key concern for Capital
One at this point. Though expense management initiatives have
significantly helped the company offset higher credit losses in
the last few years, operating expenses have been continuously
mounting. In 2012, operating expenses rose roughly 28% from the
previous year to $11.9 billion.
Further, stringent capital, liquidity and leverage ratio
requirements under the financial reform law are expected to
restrict Capital One's ability to pursue business opportunities
and further increase costs. Also, sluggish economic recovery
remains a drag on its asset quality.
Stocks That Warrant a Look
While we prefer to avoid Capital One shares until we see signs of
improvement in the company's performance, other financial
institutions that are worth considering include -
Fifth Third Bancorp
State Street Corporation
). BankUnited carries a Zacks Rank #1 (Strong Buy) whereas
Fifth Third and State Street carry a Zacks Rank #2 (Buy).
BANKUNITED INC (BKU): Free Stock Analysis
CAPITAL ONE FIN (COF): Free Stock Analysis
FIFTH THIRD BK (FITB): Free Stock Analysis
STATE ST CORP (STT): Free Stock Analysis
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