Updated with market close information
NEW YORK (TheStreet) -- FBR analyst Scott Valentin on Tuesday added Capital One Financial to his firm's "Top Picks,", saying the credit card lender's two pending acquisitions increase "confidence in 2013 earnings."
Capital One's shares closed at $46.25 Monday, returning 9% so far in January, with the banking sector starting 2012 with strength. Valentin's 12-month price target for the shares is $60, implying 30% upside. Capital One is scheduled to announce its fourth-quarter results on Jan. 19 after the markets close.
Valentin estimated that Capital One will post fourth-quarter earnings of $1.75 a share, which is way out in front of the consensus estimate of $1.55 among analysts polled by Thomson Reuters.
Capital One agreed in June to buy ING Direct from ING Groep for $6.2 billion in cash and 55.9 million common shares. During the third quarter, Capital One issued $3 billion in senior notes and closed an underwritten public offering of 40 million shares at a price of $50, which should net the company roughly $1.94 billion by the required settlement date of Feb. 15. The ING deal is expected to be completed during the first quarter.
Capital One in August agreed to purchase HSBC's U.S. credit card portfolio for an estimated premium of $2.6 billion. The transaction is considered a solid complement to leverage the increased liquidity from the ING Direct purchase, and is expected to be completed during the second quarter, with Capital One raising between $750 million and $1.25 billion in additional common equity.
Valentin said he believes the two acquisitions "have the potential to add over $1.00 of EPS growth to our FY12 core EPS estimate of $6.35 in FY13."
ING Direct's main subsidiary ING Bank, FSB had $91.7 billion in assets as of Sept. 30, with $82.3 million in deposits gathered over the Internet, and Valentin said ING Direct will provide Capital One "with the opportunity to rotate out of ING Direct's lower-yielding MBS and mortgage loan portfolio into higher-yielding assets provided by the acquisition of HSBC's $29.5 billion in U.S. domestic credit receivables."
The Federal Reserve in December proposed a new set of rules to strengthen its oversight of large U.S. financial holding companies, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama in July 2010. While the regulator didn't settle on its enhanced capital requirements, it did say it would incorporate the new Basel III capital rules, which require an extra Tier 1 common equity cushion of between 1% and 2.5% of risk-adjusted assets, for "global systemically important financial institutions," or G-SIFIs.
Valentin said that "on a pro forma basis for the ING Direct acquisition, we do not believe COF's $292 billion in assets will qualify the company as a G-SIFI, as COF does not operate outside the U.S. nor as a broker of complex derivatives."
Capital One's shares trade for 1.4 times tangible book value according to HighlineFi, and for 7.6 times the consensus 2012 EPS estimate of $6.10. Valentin called this a "compelling valuation," and bases his $60 price target on 9.5 times his 2012 earnings estimate.
Capital One's current valuation to forward earnings estimates compares to the "big four" U.S. banks, but its recent earnings and share price performance has been much stronger. The big four all saw significant pullbacks during 2011, while Capital One's shares were flat. Capital One's operating return on average assets (ROA) 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.
Here's how those numbers compared to the big four U.S. bank holding companies:
- Shares of Bank of America closed at $6.27 Monday, rising 13% year to date, after declining 58% during 2011. The shares trade for 6.9 times the consensus 2012 EPS estimate of 91 cents and for 0.5 times tangible book value, according to HighlineFI. The ROA over the past five quarters has ranged from a negative 1.51% in the second quarter of 2011, 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 closed at $35.30 Monday, returning 7% so far in January, after pulling back 20% in 2011. The shares trade for 7.3 times the consensus 2012 EPS estimate of $4.81, and 1.2 times tangible book value. The ROA over the past five quarters has ranged between 0.76% and 1.06%.
- Shares of Wells Fargo , closed at $29.30 Monday, returning 6% year to date, after sliding 10% in 2011. The shares trade for 9.1 times the consensus 2012 EPS estimate of $3.21 and 1.9 times tangible book value. The ROA has ranged between 1.12% and 1.29% over the past five quarters.
- Citigroup closed at $29.08 Monday, returning 11% year to date, after dropping 44% in 2011. The shares trade for 6.7 times the consensus 2012 EPS estimate of $4.32, and for 0.6 times tangible book value. The ROA has ranged between 0.28% and 0.76% over the past five quarters.
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