Capital One: 'Crushed It' Quarter Winner

NEW YORK ( TheStreet) -- Capital One Financial ( COF) was the big winner among the largest U.S. financial companies on Friday, with shares rising 6% to close at $60.75.

The broad indexes all saw 2% declines on the 25th anniversary of Black Monday, after a disappointing revenue result from General Electric ( GE) and an earnings miss by McDonald's ( MCD).

General Electric reported third-quarter operating earnings of $3.8 billion, or 36 cents a share, meeting the consensus estimate among analysts polled by Thomson Reuters. Operating earnings declined from 38 cents in the second quarter, but grew from 31 cents during the third quarter of 2011.

GE's third-quarter revenue of Third-quarter revenue totaled $36.3 billion, missing the consensus estimate of $36.9 billion, as foreign exchange "negatively impacted revenues by $1.1 billion." Total revenue was declined slightly from $36.5 billion the previous quarter, while growing $35.4 billion a year earlier.

GE's shares declined over 3% to close at $22.03.

McDonalds reported third-quarter earnings of $1.46 billion, or $1.43 a share, missing the consensus estimate of $1.47. Third-quarter revenue was $7.15 billion, meeting the consensus estimate. Earnings were down 3%, while revenue was flat from a year earlier, however, the company said that excluding "the impact of foreign currency translation, earnings were up 1% year-over-year, while revenue rose 4%.

Shares of McDonalds dipped 4.5% to close at $88.72.

Turning back to the financials, the KBW Bank Index ( I:BKX) was down 1% to close at 50.44, with all but three of the 24 index components showing declines.

European leaders agreed early on Friday for a new eurozone bank regulator operating in 2013, under the authority of the European Central Bank. Meanwhile the Financial Times reported that German Chancellor Angela Merkel said that the Eurozone's 500 billion euro rescue fund should not be used to bail out Spanish and Irish banks, but should be reserved to rescue troubled financial institutions going forward. A rescue of Spanish and Irish banks would "not be a retroactive recapitalization," she said, adding that "if direct recapitalization is possible, it will come in the future."

Capital One "Crushed it"

Following Thursday's market close, Capital One reported third-quarter earnings available to common shareholders of $1.17 billion, or $2.01 a share (excluding income from discontinued operations), beating the consensus estimate of $1.68.

This was Capital One's first "clean quarter" this year, following the company's first-quarter acquisition of ING Direct, which enhanced liquidity before the company purchased HSBC's $27 billion U.S. credit card portfolio in the second quarter. Earnings to common shareholders increased from $813 million, or $1.77 a share, during the third quarter of 2011.

Capital One's third-quarter return on average assets was 1.60% and its return on average tangible equity was 21.48%, compared to ROA of 11.80% and ROTCE of 22.58% a year earlier.

The company's net interest margin -- the average yield on loans and investments less the average cost for deposits and borrowings -- increased was 6.97% in the third quarter, increasing from 6.04% the previous quarter (when the company's margin declined because of the ING acquisition, without yet realizing a full quarter's benefit from the HSBC cards), but narrowing from 7.40% a year earlier.

The narrowing of the net interest margin year-over-year is in line with most large U.S. banks, as the Federal Reserve has kept its target federal funds rate in a range of zero to 0.25% since the end of 2008, while the central bank in September significantly ramped up its purchasing of long-term mortgage-backed securities, in an effort to keep long-term rates at historically low levels.

With the upheaval of the two acquisitions behind the company, Capital One CFO Gary Pelin said during the company's earnings conference call that "as the impact of the acquisitions on this metric have largely played through, we expect significantly less variability in NIM going forward."

Oppenheimer analyst Chris Kotowski said that Capital One "crushed it," beating his third-quarter EPS estimate of $1.63, although there were "complicated purchase accounting impacts and moving parts that keep us from simply multiplying the $2.01 by four to estimate 2013."

Kotowski rates Capital One a "Buy," and said that "investors are yearning for two comparable quarters from COF, and this wasn't it. However, while we are once again left with an unease about all the moving parts, a $7+ number in 2013 seems very reasonable to us, and our target for the stock is now $71." Kotowski raised his price target for Capital One from $68.00.

The analyst estimates that Capital One will earn $7.02 a share in 2013.

Capital One's shares have now returned 44% year-to-date, following a flat during 2011.

The shares trade for 1.8 times their reported Sept. 30 tangible book value of $40.17, and for nine times the consensus 2013 EPS estimate of $7.08.

COF Chart COF data by YCharts

Interested in more on Capital One Financial? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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