Capital One: Sequester Friday Winner

NEW YORK ( TheStreet) -- Capital One ( COF) was the winner among the largest U.S. banks on Friday, with shares rising 2% to close at $51.87.

Investors yawned on "Sequester Friday," as time ran out for Congress and President Obama to arrive at a compromise to avert $85 billion in federal spending cuts this year. The broad indexes all ended with slight gains. The KBW Bank Index ( I:BKX) was also up slightly to close at 54.15.

Economic news was mixed. The Bureau of Economic Analysis reported that personal income in January declined 3.6% after rising 2.6% in December. The consensus among economists was for personal income to decline by 2.4%, according to Zacks. The decline was expected, because of the increased federal income tax rates for people earning over $400,000 a year, and because the temporary 2% reduction in the social security withholding tax for all workers expired at the end of last year.

The Institute for Supply Management said that its manufacturing index rose to rose to 54.2 in February from 53.1 in January, for its strongest reading since June 2011. Economists were expecting the PMI for February to decline to 52.6.

Capital One


Capital One's shares have declined 10% this year, following a 36% return in 2012. The shares trade for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, and for 7.7 times the consensus 2014 earnings estimate of $6.72 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $6.40.

The company had a disappointing fourth quarter, with CFO Gary Perlin blaming a sequential earnings decline on "seasonal expenses and margin trends." The company lowered its guidance for 2013 to essentially match its fourth-quarter results.

Then on Feb. 15, Capital One released data showing that its domestic credit card balances had declined by 3% in January, from the previous month. The company's agreement on Feb. 20 to sell its $7 billion Best Buy ( BBY) credit card portfolio to Citigroup ( C) will mean a further decline in card balances, when the deal is completed during the third quarter.

In its annual 10-K filing on Friday, Capital One said that its "best estimate" for losses from mortgage repurchase claims in excess of its reserves for these claims, was $2.7 billion as of Dec. 31, increasing from $1.7 billion the previous quarter.

KBW analyst Sanjay Sakhrani on in a report on Friday that the increased putback exposure "is a negative headline as it now represents 7% of the company's tangible book value as of 4Q12." The analyst added that "while COF provided updated color around the sale of the Best Buy portfolio, we think it still remains difficult to quantify the impact to earnings with any specificity at this time."

Sakhrani on Feb 19 estimated that the Best Buy card sale would lower Capital One's annual earnings by $0.15 to $0.25 a share.

"Overall, while the announcements are not a positive, ultimately we believe that the stock currently trades at depressed levels and COF remains an Outperform rated stock," Sakhrani wrote.

The analyst's price target for Capital One's shares is $65.00, and he estimates the company will earn $6.30 a share this year, with EPS rising to $6.33 in 2014.

COF Chart COF data by YCharts

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

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

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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 TheStreet.com 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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