Capital One: The Value in Banks and Credit Cards

Capital One (NYSE: COF) is a fascinating hybrid of a financial services company. It is both a bank and a credit card company and it makes a lot of money.

Capital One is a value investment because it makes a lot of money and carries a lot of float like a bank. Yet it is also experiencing a lot of growth, which makes a really good long-term buy and hold play.

The most impressive number at Capital One these days is revenues. During the year between June 2015 and June 2016, Capital One’s revenues grew by $1.8 billion; rising from $22.77 billion to $24.57 billion.

Capital One is making a Lot of Money

That revenue is translating into a lot of money – Capital One reported a net income of $3.989 billion on June 30, 2016. That was down from $4.096 billion in June 2015, but still very impressive. Among other things that income gave Capital One a profit margin of 15.06%.

It also translated into a lot of cash and float as demonstrated by these numbers from June 30, 2016:

  • A free cash flow of $2.276 billion.

 

  • Cash and short-term investments of $7.093 billion.

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  • $21.82 billion in cash from financing.

 

  • $12.35 billion in cash from operations.

 

All that made for assets of $339.12 billion. Capital One is a very profitable company that makes a lot of money, but it’s also tremendously undervalued.

Capital One is Tremendously Undervalued

The most interesting thing about Capital One from a speculator’s perspective is that it appears to be undervalued. On August 26, 2016; Capital One had a market capitalization of $34.84 billion and an enterprise value of $85.89 billion.

That means its share price of $71.51 on September 2, 2016, looks quite low. My guess is that popular distrust and dislike of the banking industry is keeping the price low. If you’re looking for a stock with room to appreciate this is it.

More importantly you will make some money because Capital One delivered a dividend yield of 2.32% and a return on equity of 8.4% on June 30, 2016. That was lower than American Express (NYSE: AXP), Discover Financial (NYSE: DFS) or Synchrony Financial (NYSE: SYF) but still impressive.

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One reason why the return on equity was lower is that Capital One’s stock has been a little more stable than some of its competitors. Over the past year American Express reached a high of $76.65 a share and fell to a low of $51.11. Capital One only dropped below $60 a share once ($58.15 a share on June 27, 2016) but usually stayed at around $70 (it was at $65.25.93 on September 2, 2016).

My guess is that this reflects Capital One’s lower profile and more stable business model. Its’ consumer focused business model, does not always attract Mr. Market’s attention but it sure makes a lot of money.

Consumer Focus Pays Off at Capital One

Much of Capital One’s success comes from that consumer focus. I’ve been a customer for years and I’ve never had a serious problem. The few times I’ve had to call in, my problems were fixed quickly and easily.

The last time I talked to a Capital One operator, I was pleasantly surprised when she suggested a new product (a checking account) that was actually a pretty good deal. Capital One is making some strides in online banking that should make Bank of Internet (NASDAQ: BOFI) nervous.

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Its new online checking account which offers no minimum balance is actually pretty useful. I like the lack of overdraft fees and the ease with which the bill pay works. I was able to pay my car insurance and electric bill by simply typing in a few numbers.

If you are one of those people who believes that online banking is the future, you should check out Capital One. It has none of the risks of BOFI and it actually pays a dividend (BOFI does not according to our friends at ycharts).

Another feature I appreciate is that there is no scandal of the week, like those which plague the Motley Fool favorite BOFI. So if you’re looking for a diversified financial services investment check out Capital One. Despite those obnoxious commercials with Samuel L. Jackson, it is still one of the best value investments in the financial services sector.