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Capital One Backtracks On Private Label

Darst lowered his price target for Capital One's shares to $59.00 from $66.00, while lowering his 2013 earnings estimate to $6.40 a share from $6.55. The analyst also lowered his 2014 EPS estimate to $6.85 from $7.20.

In his report, Darst wrote that "recent results and a now greater decline in loans and earnings for 2013 suggest there are fewer levers for EPS growth and value creation. As a result, we believe the shares will trade for a discount relative to peers with fewer catalysts to support earnings multiple expansion."

Darst also said that Capital One's shares could benefit from "increased dividends in 2013 and share repurchases in 2014 from capital growth this year," but also said he expected the shares to continue trading for roughly nine times forward earnings estimates "until a more favorable growth outlook returns."

Sticking with Positive Ratings

KBW analyst Sanjay Sakhrani late on Tuesday reiterated his "outperform" rating for Capital One, with a price target of $65.00, saying in a report that "while this announcement is certainly not an optimal scenario, we feel this is more than discounted into the shares."

Sakhrani estimated that the sale of the Best Buy portfolio "could create an EPS drag of about $0.15-$0.25/share" in 2014. However, "on the positive side for future (potential) capital return, we estimate the sale could also benefit COF's capital ratios by about 30-40 bps on a Basel I basis," he wrote.

Citigroup analyst Donald Fandetti stood by his "buy" rating for Capital One, with a $67.00 price target, and said in the company's defense in a report on Wednesday that "we believe most of the premium they paid for the HSBC portfolio was for the general purpose cards, not the private label platform."

"We believe COF and Best Buy had a choppy relationship from the beginning and their contract was due to expire in 2014, so this just accelerates the process," Fandetti wrote. The analyst also said that the sale "could also indicate that COF, as a new entrant to the private label business, is struggling."

Regarding the effect of the sale on Capital One's financial results, Fandetti wrote that "the key issue is the earnings impact in 2014. COF will either 1) replace these assets with more private label cards or 2) their appetite for capital return would increase meaning they would likely buy-back more stock in 2014." The analyst estimates that Capital One will earn $6.45 a share this year, with EPS increasing to $6.83 in 2014.

Shares are Cheap

Capital One's shares closed at $53.12 Tuesday, down 9% year-to-date, following last year's 36% return. The shares trade for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, and for 7.8 times the consensus 2014 EPS estimate of $6.80, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $6.45.

That forward price-to-earnings ratio is quite low in the current environment, and is even lower than the ratios for the "big four" U.S. banks, which have far more moving parts and regulatory targets on their backs:
  • Shares of Citigroup closed at $44.50 Tuesday, trading for 8.6 times the consensus 2014 EPS estimate of $5.20.
  • Bank of America(BAC - Get Report) closed at $12.19 Tuesday, trading for 9.5 times the consensus 2014 EPS estimate of $1.29.
  • Shares of JPMorgan Chase(JPM - Get Report) closed at $49.45 Tuesday, trading for 8.6 times the consensus 2014 EPS estimate of $5.77.
  • Wells Fargo(WFC - Get Report) closed at $35.10 Tuesday, trading for 9.0 times the consensus 2014 EPS estimate of $3.89.

Good for Citi

Guggenheim analyst Marty Mosby on Wednesday reiterated his "buy" rating for Citigroup, with a $57.00 price target, saying in a note that the Best Buy portfolio purchase "could be accretive to C's current earnings power by as much as 2%."
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