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Capital One: A Bank That Actually Gets It

Stocks in this article: COF BAC C JPM WFC

Story updated with additional analysis.

NEW YORK ( TheStreet) -- Capital One's (COF) deal to acquire HSBC's (HBC) U.S. credit card business shows that the company knows where the action is.

And investors get it.

The shares are up slightly to $41, even as the market rout of the financial sector has resumed.

Capital One's deal to pay a premium of $2.6 billion for HSBC's $30 billion U.S. credit card portfolio fits in perfectly with the company's agreement to purchase ING Direct from ING Groep (ING), as the cheap core deposits from ING Direct will be more than adequate to fund the acquired card portfolio, thus increasing Capital One's interest rate spread, and its earnings power.

Capital One said the card portfolio acquisition would be accretive to 2013 earnings, with a "return on invested capital expected to be greater than 25 percent."

The deal is expected to close in the second quarter of 2012, and follows Capital One's agreement which included a $2 billion capital raise that was completed in July.

Capital One said that it planned to raise an additional $1.25 billion in capital to partially fund the HSBC card acquisition. Assuming a $40 price for a common equity offering -- and factoring in the coming issuance of 55.9 million shares to ING Groep when that deal is completed in late 2011 or early 2012 -- the coming capital raise for the HSBC deal represents a further 6% increase to Capital One's common share count.

That dilution is mitigated by the shares' 10% pullback over the past week, to Tuesday's closing price of $40.82.

One analyst estimated that the deal would add $1.25 a share to the company's 2013 earnings. The current consensus EPS estimate for Capital One in 2013 is $6.01 a share, among analysts polled by FactSet.

Despite the U.S. housing market still going through a multi-year shakeout, credit card quality has improved dramatically and Capital One has posted strong earnings over the past year. It makes sense for the company to stay focused on its core competency and grow its amazingly profitable card business.

Looking at the numbers, Capital One's shares are so cheaply valued, that concerns over the latest dilution to the shares seems overblown.

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