Antipodes: CapitalOne Financial Corporation
Ticker NYSE: COF (US)
Sector Financials
Despite having household name status in the US, Capital One (COF) is anything but common in investor portfolios. Emerging from nowhere 20 years ago, this dynamic business is today the fourth largest US retail bank by deposits with a stronghold in the subprime card and auto lending market.
COF’s visionary management is both disciplined and innovative, which has led to profits every year since listing in 1994. The firm has blazed trails in brand and product capabilities. A decade of having Samuel L Jackson and Jennifer Garner ask Americans “What’s in your wallet?” has catapulted COF to become the largest US card player with 50million accounts. Yet, 12 years after the 2008 financial crisis, “subprime” remains a dirty word and the stock’s current price reflects cynicism around the outlook for credit losses.
Antipodes is more optimistic. COF has a great record for pricing and risk management, best evidenced by reducing credit limits in August this year. The moat around the bank’s financials is deep, enough so to withstand GFC level loan write-offs whilst still allowing the distribution of half of its current market capitalisation through to FY23 and trading on 6x FY23 earnings (i.e. a 16%+ yield). There are growth opportunities too: the transition of COF’s workloads to the public cloud (AWS) in 2021 will deliver agility to further innovate product lines and significantly reduce overheads.
Possible changes to banking capital regulations following the US elections in November could pose a risk. Whilst a Trump win could result in further deregulation, a Biden win and Democratic Senate majority may lead to regulation of consumer finance costs (which COF is well buffered to handle) and raise the hurdles for returning capital.
COF currently trades at 0.9x tangible book value, a 33% discount versus its 10-year average of 1.35x.
Source: Antipodes Partners, Capital One.
This information has been prepared and provided by Antipodes. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.
