Play Capital One for Capital Return: JPMorgan

NEW YORK (TheStreet) -- Saying that "cash-back rewards aren't just important to cardholders," JPMorgan analyst Richard Shane late on Friday Capital One (COF) made the case that investors can expect a major buybacks from the company.

Following a meeting with Capital One CEO Richard Fairbank and CFO Gary Perlin, Shane reiterated his "Overweight" rating for the card lender, with a $70 price target, saying that "systematically returning capital remains the biggest potential catalyst for the stock," and that "we are modeling $2.4B of repurchases in 2013."

Capital One's shares closed at $57.41 Friday, returning 36% year-to-date, following a flat return during 2011. The shares trade for 1.7 times tangible book value, according to Thomson Reuters Bank Insight, but for only 8.3 times the consensus 2013 EPS estimate of $6.91, among analysts polled by Thomson Reuters, making Capital One among the cheapest stocks, among the largest U.S. banks.

While the company had a messy second-quarter, with many one-time charges related to the acquisition of HSBC's U.S. credit card portfolio and the first-quarter acquisition of ING Direct (USA), a quick look at other cheaply priced large U.S. banks shows that Capital One has a superior recent earnings track record.

Capital One's second-quarter return on average assets (ROA) was only 0.13%, according to Thomson Reuters Bank Insight, as the company set aside $1.2 billion for reserves on the acquired HSBC card loans. COF also reported "an expense of $174 million to establish a finance charge and fee reserve for estimated uncollectible billed finance charges and fees and loan premium amortization expense of $63 million," and was hit with $60 million in civil penalties related to credit card settlements with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, along with $150 million in refunds to the company's credit card customers."

But over the preceding four quarters Capital One's ROA ranged from 0.82% to 2.28%.

Here's a quick comparison with the four largest U.S. banks, all of which are cheaply priced to forward earnings estimates:

• Shares of JPMorgan Chase (JPM) closed at $39.30 Friday, returning 21% year-to-date, following a 20% decline in 2011. The shares trade for 1.2 times tangible book value, and for 7.6 times the consensus 2013 EPS estimate of $5.20. JPMorgan Chase's ROA has ranged between 0.68% and 0.99% over the past five quarters, according to Thomson Reuters Bank Insight.
• Shares of Citigroup (C) closed at $32.07 Friday, returning 22% year-to-date, following a 44% decline during 2011. The shares trade for 0.6 times tangible book value and for 7.1 times the consensus 2013 EPS estimate of $4.53. Citi's ROA has ranged between 0.20% and 0.77% over the past five quarters.
• Shares of Bank of America (BAC) closed at $8.80 Friday, returning 59% year-to-date, following a 58% drop during 2011. The shares trade 0.7 times tangible book value, and for 9.7 times the consensus 2013 EPS estimate of 91 cents. Over the past five quarters, the company's ROA has ranged from a negative 1.51% -- in the second quarter of 2011, when BAC lost $8.8 billion, mainly because of a mortgage putback settlement -- to 1.08%, in the third quarter of 2011.
• Shares of Wells Fargo (WFC) closed at $35.00 Friday, returning 30% year-to-date, after declining 10% during 2011. The shares trade twice their tangible book value, and for 9.5 times the consensus 2013 EPS estimate of $3.6 cents. Over the past five quarters, the company's ROA has ranged from 1.26% to 1.40%.
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Shane said that during the analyst meeting on Friday with Capital One's top executives, it was made clear that "the primary issue for investors is COF's willingness and ability to return capital to shareholders," through share buybacks and/or dividend increases.

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