Is Capital One Worth The Risk?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Judging by the reaction it appears investors are betting the word from the Fed regarding Capital One’s (NYSE: COF) purchase of ING Direct -- the company’s online banking unit for a cool $8.9 billion -- will be allowed. What’s the hold up? The fear is Capital One becoming another of the infamous too-big-to-fail institutions at a time when the bitter taste of bailouts, foreclosures and failed banks still lingers. Investors will have to wait until Monday after the Fed announced they are delaying their decision until the 13th.
If the deal goes down it would be a real shot in the arm for a company and a stock that needs it. Investors and analysts have been less than enamored with the $22 billion financial holding firm the past month as the stock meanders between $45 and $48 a share. Though the company’s numbers in Q4 left a bit to be desired the annual results were actually fairly good. Those results combined with a credit card environment that appears to be growing as we move further into 2012 has COF positioned well for the value investor willing to take on some risk.
Not all was or is rosy over at COF headquarters, as mentioned. Management needs to get a firm grasp on expenses as both marketing and operating costs severely limited income in Q4. The $321 million jump in expenses from the prior quarter included some write-downs and litigation expenses, but those can’t be held responsible for the entire hike. There's work to be done here.
It is nice to see the loan portfolio growing and the mid-year assimilation of the HSBC U.S. card portfolio, in addition to ING Direct will help the diversified institution grow in these core areas.
For potential COF investors not yet swayed by the annual results and a stock price that’s just 6.8 times earnings, American Express (NYSE: AXP) and their portfolio of products and services may prove more suitable. At 12.63 times earnings American Express is relatively inexpensive compared to others in the industry and is a sound investment after posting their 3rd consecutive year of revenue and earnings growth. Both firms will profit from the recently announced increased consumer borrowing as well.
For Capital One investors getting past last quarter's significant decline in net income, at least quarter over quarter, is proving difficult and understandably so. But for those willing to take on a bit more risk COF is selling at bargain basement prices. And with the recent acquisitions and a slow return to their core financial service lines, COF may well be a risk worth taking.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article. Motley Fool newsletter services recommend American Express Company. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.