This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Capital One: A Bank That Actually Gets It

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.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs