Wall Street takes a nap – Buy this cheap stock today

Capital One Financial (NYSE: COF) the stock has returned over 56% this year, exceeding the S&P 500 as well as the financial sector. However, when we look at its valuation, it remains undervalued with strong prospects for future growth.

While many investors have jumped on board, many others have missed the boat on this still relatively cheap stock. Let’s see why Capital One is a good buy right now at its current valuation.

Image source: Getty Images.

Credit card revenues are on the rise

You know the slogan “What’s in your wallet?” Then you know that Capital One is first and foremost a credit card issuer, which means it lends money to its credit card holders and earns money on the interest paid on the loans, as well as on the transfer fees of the traders who carry out the sale. The company derives about 60% of its revenue from the credit card business. But Capital One is also a traditional bank, providing personal and business banking services with some 470 branches in nine states, primarily in Virginia, Washington, DC and the Mid-Atlantic region.

Capital One’s profits had been fairly stable for most of the past decade and fell sharply during the pandemic, like most banks, but have risen over the past year and a half during the economic recovery. In the third quarter, Capital One reported a 6% year-over-year increase in revenue to $ 7.8 billion, while net income jumped 29% to $ 3 billion, or 6 , $ 81 per share. Net interest income made up the bulk of income, about $ 6.2 billion, up 11% year-over-year. The net interest margin stood at 6.35%, up 67 basis points from the second quarter of 2020.

The earnings gains were due to strong loan growth, with loans held for investment purposes at the end of the period increasing 5% to $ 261.4 billion. Credit card loans jumped 4% to $ 105 billion, including $ 99.3 billion from national cards. This is because domestic credit card revenues grew 14% year-over-year, while purchasing volume climbed 28%.

In addition, the billing rate for domestic cards was 1.36%, down 228 basis points from a year ago. Commercial bank loans also rose 7% to $ 79.2 billion, while consumer bank loans jumped 3% to $ 77.1 billion and auto loans rose 4% to 74, $ 7 billion.

Technology and Marketing Drive Growth

There are a few factors driving Capital One’s growth, starting with the economy. While rising consumer prices and supply chain issues are a concern, the economy is expected to grow 5.6% in 2021 and 4% in 2022, according to economists at Goldman Sachs. The recently passed $ 1.2 trillion infrastructure bill and the pending $ 1.7 trillion Build Back Better bill could spur economic growth.

Internally, officials at Capital One see a few factors driving its growth, one being an aggressive marketing campaign. The company saw its marketing spend increase 165% year-over-year in the third quarter and 21% in the second quarter of 2021 as the company continues to build its already strong brand. During the third quarter earnings call, CEO Rich Fairbank said:

We are focusing more on marketing to drive growth and develop our franchise. At the same time, we are keeping a close eye on the intensifying competitive environment. Looking ahead, we expect a sequential increase in the company’s total marketing in the fourth quarter, in line with typical historical trends.

Fairbank said it also sees a technology advantage for Capital One, as the company has steadily invested in technology upgrades over the past decade. “Our technological transformation is changing the trajectory of Capital One … by driving growth, improving efficiency, strengthening risk management, enhancing the brand and improving our status as the destination of choice for great talent.” Fairbank explained.

These investments are starting to bear fruit as the efficiency ratio fell to 53.4% ​​in the third quarter from 53.8% in the previous quarter, and the operating efficiency ratio (operating expenses divided by the total net income) fell to 43.9% from 45.4% in the second quarter. . The aim is to increase efficiency in the quarters and years to come.

Good value

Capital One’s share price is up around 56% year-to-date, and analysts forecast a consensus increase of 24% in 2022, largely based on these growth drivers and its low valuation. .

Capital One has a price to book (P / B) ratio of 1, which means the stock is trading in accordance with its book value. But a low price-to-earnings (P / E) ratio of just 5.6, and a price-to-earnings-growth ratio (PEG) of 0.45, indicate a stock with higher earnings potential than the market recognizes. This is supported by a high return on equity (ROE) of 20.6%, an operating margin of 51.3% and a profit margin of 41.2%, which is significantly higher than during the last decade.

So it looks like Capital One is in a good position to grow, given its low valuation and revenue outlook. It might be an action to consider before Wall Street wakes up and sees its value.

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Dave Kovaleski has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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