Capital One: Top Bank Stock Pick for 2012

NEW YORK (TheStreet) -- Capital One (COF) is a top pick among bank stocks for 2012, with continued strength in earnings and a historically low valuation to forward earnings estimates and book value.

The company expects to receive the Federal Reserve's approval of its agreement to purchase ING Direct (USA) from ING Groep (ING) for roughly $9 billion, following a series of three public hearings held by the Fed and completed in October, where various consumer groups voiced their opposition to the deal.

The Office of the Comptroller of the Currency has reopened its public comment period for Capital One's pending deal to acquire HSBC's (HBC) U.S. credit card portfolio for a premium of $2.6 billion.

Capital One still expects the ING deal to be completed late this year or early in 2012, providing needed liquidity for the HSBC card deal, which is expected to close in the second quarter.

Shares of Capital One closed at $45.15 Monday, rising 7% year-to-date, which is a strong return in a year that has seen the KBW Bank Index (I:BKX) pull back 27%. And the shares trade at valuations similar to the "big four" U.S. bank holding companies, while Capital One has posted much stronger earnings results.

The better earnings for Capital One are no surprise, with credit cards providing 65% of third-quarter revenue and 70% of earnings from continued operations, after tax. Capital One's operating return on average assets was 1.72% in the third quarter according to SNL Financial, and has ranged between 1.42% and 2.08% over the past five quarters.

The shares trade for just 7.5 times the consensus 2012 earnings estimate of $6.14 a share, among analysts polled by FactSet, and for 1.4 times tangible book value, according to SNL.

Let's see how these numbers stack up against the big four U.S. bank holding companies:

• Shares of Bank of America (BAC) closed at $5.45 Monday, down 59% year-to-date. The shares trade for 5.8 times the consensus 2012 EPS estimate of 99 cents and for 0.4 times tangible book value. The ROA over the past five quarters has ranged from a negative 1.51% in the second quarter, when the company posted a net loss of $9.1 billion, springing from a $14.5 billion loss in its Consumer Real Estate division as it tried to put mortgage putback demands behind it, to a positive ROA of 1.08% in the third quarter.
• JPMorgan Chase (JPM) closed at $32.04 Monday, down 23% year to date. The shares trade for 6.8 times the consensus 2012 EPS estimate of $4.88, and just under tangible book value. The ROA over the past five quarters has ranged between 0.76% and 1.06%.
• Shares of Wells Fargo (WFC), closed at $26.29 Monday, down 14% year-to-date. The shares trade for 8.4 times the consensus 2012 EPS estimate of $3.20 and 1.5 times tangible book value. The ROA has ranged between 1.12% and 1.29% over the past five quarters.
• Citigroup (C) closed at $27.22 Monday, down 42% year-to-date. The shares trade for 6.6 times the consensus 2012 EPS estimate of $4.34, and for just over half their tangible book value. The ROA has ranged between 0.28% and 0.76% over the past five quarters.

You get what you pay for, and Capital One is putting up consistent earnings numbers. Looking back to the five full years before the credit crisis nearly wiped-out the company's earnings in 2008, Capital One's ROA ranged from 1.74% to 3.05%, and the shares tended to trade in a range of 14 to 27 times trailing earnings.

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