Investment Analysis By:
Devopama Pant
Qiao Du
Tianlin Fu
Date of Presentation:11/18/2014
Agenda
Current Holdings
Company Overview
Macro-Economic Overview
Industry Analysis
Strategic Analysis
Financial Analysis and Projections
Valuation
Recommendation
Current Holdings
100 shares bought on Dec 09, 2013 @ $73.13
 Current Price: $81.14 (11/17/2014)
 Gain (as on 11/17): 10.95%
 Portfolio share(MV): 4.35%

PORTFOLIO
ABBV
ABT
AEO
AL
COF
JKHY
LF
NHC
PETM
SNA
COF
4.35%
UNP
WAG
ZIXI
COF: Overview
 U.S. based bank holding company, specializing in credit
cards, auto loans, retail banking and mortgages
 A Fortune 500 company with more than 45M
customers
 One of US top 10 largest banks based on deposits
 Founded in 1994 by Richard Fairbanks & Nigel Morris
 Headquartered in McLean, Virginia
 Richard Fairbanks is current CEO and President
 41K employees with businesses in US, UK and Canada
Source : http://www.capitalone.com/about/
COF: History
1994
Signet Banking Corporation announces its IPO and creation of a new credit card unit,
Capital One Financial Corp.
1996
COF starts doing business in Canada and the United Kingdom.
1998
The company acquires a U.S. auto lending operation.
2001
The company buys online auto finance and elective medical and dental procedures
finance businesses.
2005
Acquired New Orleans-based Hibernia Bank
2006
Acquired North Fork Bank, a New York-area lender
2009
Acquired Chevy Chase Bank
2011
Acquired Hudson’s Bay Company - Card Portfolio from GE and Kohl's - Card portfolio
from Chase
Feb-12
Acquired ING Direct, online banking division of ING
May-12
Acquired HSBC's US Card and Retail Business
Sep-13
Sale of Best Buy - Card Portfolio to Citibank
Source : http://commercialobserver.com/2012/06/capital-one-grows-minus-pains/
2011,12,13 Annual Reports
Experiments
USPS negotiated services at bulk discount
mailing agreement
 Softcard (formerly Isis Mobile Wallet) Payment
(Feb/2012)
 Clear Exchange (Feb 2014)~ P-2-P money
transfer
 Decoupled Debit Cards (May/2007)~ opened
with “merchant” financial institution

Credit Card Growth after 2008
Source : http://www.nilsonreport.com/publication_newsletter_archive_issue.php?issue=1035
COF: Lines of Business
COF: Lines of Business (contd..)
Loan Portfolio Composition
$B
$250
$206
$200
Other
$197
Mortgage
$150
$126 $136
$100
$80
$4
1994
Source : COF Annual Reports
2004
Auto
Installment
Loans
International
Card
Domestic
Card
$50
$
Commercial
2010 2011 2012 2013
Industry Review




Primary Activities: Providing credit through credit cards
Industry participants make money by collecting interest on debt and
fees from card owners and merchants.
Cardholder
Major Products & Services:
Fees
◦ Cardholder Fees (34.2%)
Interchange
◦ Interchange Fees (34.3%)
Fees
◦ Interest Income (31.5%)
Interest
Income
Major Markets:
Youg &
◦ Young Adults & College Students (15%)
Students
◦ Adults aged 26 to 60 (59%)
Adults 26
◦ Business & Adults aged 60+ (26%)
to 90
Business
& Adults
60+
Source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD,
1 Oct. 2014. Web. 18 Nov. 2014. <http://www.ibisworld.com/industry/default.aspx?indid=1293>.
Industry Review (Cont’d)
The economy
is stable
Spend money
& paying off
debt
The industry
makes solid
returns
The
economy is
struggling
Stop paying
some bills
Credit card
companies
suffer
Consumers could
not pay off debt
obligations
Industry set aside a
portion of revenue
to cover losses,
directly impact
profit margins
Higher
unemployment,
more bankruptcies
Collapse of several
large financial
institutions
Hurt industry
revenue and slow
the profit growth
Source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD, 1 Oct. 2014. Web. 18 Nov. 2014.
<http://www.ibisworld.com/industry/default.aspx?indid=1293>.
Government Regulation & Legislation





Bank Holding Company Act (1956)
Truth in Lending Act (1968) & the Schumer
Box
The Credit Card Accountability Responsibility
and Disclosure (CARD) Act (2009)
The Dodd-Frank Act (2010)
Basel III
source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD, 1 Oct. 2014. Web. 18 Nov. 2014.
<http://www.ibisworld.com/industry/default.aspx?indid=1293>.
Major Competitors





American Express Co. (20.2%)
Bank of America Corp. (17.5%)
JPMorgan Chase (16.9%)
Citigroup Inc. (9.4%)
Discover Financial Service Inc. (7.2%)
(Capital One Corp. 14.2%)
HHI=1554.9 ∈(1500, 2500)
CR4=68.8∈(50, ∝)
Moderately Concentrated Market & Tight Oligopoly
Industry
Source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD, 1 Oct. 2014. Web.
18 Nov. 2014. <http://www.ibisworld.com/industry/default.aspx?indid=1293>.
Management

Richard D. Fairbank, Founder, Chairman and CEO
◦ Founding Belief: the power of information, technology, testing and great
people could be combined to bring highly customized financial products
directly to customers. (1988)
◦ Recognized for his community and industry leadership
◦ Used to serve MasterCard International’s Global Board of Directors and
Chairman of MasterCard’s U.S. Region Board

Company Culture :
◦ Two Key Values:
 Excellence
 Do the Right Thing
◦ Widely recognized for entrepreneurial culture, progressive work place, and
community engagement

Risk Management: “Three Lines of Defense” risk framework
Source: "Leadership." Capital One. Capital One. Web. 18 Nov. 2014. <http://www.capitalone.com/about/corporate-information/leadership/?Log=1&EventType=Link&ComponentType=T&LOB=MTS::LCTMJBE8Z&PageName=Corporate
Information&PortletLocation=4;4-8-4-col;1-1-1&ComponentName=secondary_nav&ContentElement=7;Leadership&TargetLob=MTS::LCTMJBE8Z&TargetPageName=Leadership&referer=https://www.capitalone.com/about/corporate-information>.
Total US Debt
Source : Federal Reserve Bank of New York (http://www.newyorkfed.org/householdcredit/2014-q1/)
Unemployment Rate
US Unemployment Rate
%
12
10
8
6
4
2
0
20
04
20
05
20
06
20
07
20
08
Source : Bureau of Labor Statistics (http://data.bls.gov/timeseries/LNS14000000)
20
09
20
10
20
11
20
12
20
13
20
14
Credit Card Delinquency Rates
Source : Card Hub (http://www.cardhub.com/edu/credit-card-charge-off-delinquency-statistics)
Interest Rates
Source : Trading Economics (http://www.tradingeconomics.com/united-states/interest-rate)
Consumer Confidence & Spending
Consumer
Confidence
Consumer
Spending
Source : Trading Economics (http://www.tradingeconomics.com/united-states/consumer-spending; http://www.tradingeconomics.com/united-states/consumer-confidence)
COF : Strategic Analysis
Porter’s Five Forces
Threat of new
Entrants (Low)
Bargaining Power of Suppliers (Low)
• Bigger banks have significant leverage due to
their bigger asset bases
• Fed controlled interest rates are at a
historically low level
• Only 2 new banks
started in last 3
years
• Extensive capital,
legal and regulatory
requirements for a
new entrant
• Dominant position
of existing players
• Difficult to grow
quickly in a highly
competitive market
Industry Rivalry (High)
• Large no. of banks offering competitive
products
• High volatility in market share
• Banks need to respond quickly to integrate
rapidly evolving technology into financial
products
Bargaining Power of Borrowers
(Medium)
• Competitor banks continuously try to woo
customers by offering promotional offers
• Customers can shop for best product/pricing
very easily
Threat of
Substitutes
(High)
• Threat from newer
players like credit
unions, technology
companies and
growth in cash/debit
card payments
• Difficult to achieve
product
differentiation
COF : SWOT
S
trengths
• Strong returns across multiple years
• Full spectrum card lender with
diversification in auto and home loans
• Proven track record of successfully
managing credit risk in downturn
W
eaknesses
• Big Subprime lending results in negative
market perception
• Lack of geographical diversification – based
primarily in one market, U.S.
• Virtual monopoly in Subprime card market
• Lesser brand recognition in Prime and
Super Prime space
• Resilient performance in stress tests
• Significantly lower card satisfaction rates
• Known for data-driven analytics
O
pportunities
T
hreats
• Growth potential in Private Label credit
card space, post HSBC acquisition
• Loss rates and interest rates are at all time
lows, and are bound to go up
• Expansion of international business in UK
and Canada
• Further regulations in Credit Cards
• Expand in mortgage and home equity
business
• Privacy and customer data breach
• Volatility in financial markets
Ratio Analysis
Multiples Analysis
2009
2010
1.4
1.6
29.9
6.4
0.7
0.7
Ratio Analysis
13.8%
11.6%
4.0%
5.2%
10.3%
8.1%
P/Tangible Book
P/E
P/Book
Tier 1 Ratio
Tier 2 Ratio
Leverage Ratio
16.0%
35.0
14.0%
30.0
12.0%
2011
1.3
6.0
0.7
2012
1.4
9.3
0.8
2013
1.6
10.1
1.1
12.0%
2.9%
10.1%
11.3%
2.2%
8.7%
12.6%
2.1%
10.1%
25.0
10.0%
Tier 1 Ratio
8.0%
20.0
P/Tangible Book
Tier 2 Ratio
6.0%
Leverage Ratio
4.0%
10.0
2.0%
5.0
0.0%
2009
2010
2011
2012
Source: Bloomberg and Capital IQ
2013
P/Book
15.0
P/E
0.0
2009
2010
2011
2012
2013
Comparable Analysis
Company Name
P/Diluted EPS
Before Extra LTM Latest
P/TangBV LTM Latest
NTM Forward P/E
P/Book Value Per Share
Bank of America Corporation (NYSE:BAC)
42.9x
1.2x
11.99x
0.82x
American Express Company (NYSE:AXP)
16.9x
4.7x
15.47x
4.64x
Citigroup Inc. (NYSE:C)
18.7x
0.9x
10.25x
0.80x
JPMorgan Chase & Co. (NYSE:JPM)
11.2x
1.4x
10.25x
1.07x
Discover Financial Services (NYSE:DFS)
12.4x
2.9x
12.08x
2.76x
Capital One Financial Corporation (NYSE:COF)
11.0x
1.6x
10.30x
1.04x
P/Diluted EPS
Before Extra LTM Latest
P/TangBV LTM Latest
NTM Forward P/E
P/Book Value Per Share
High
42.9x
4.7x
15.47x
4.64x
Low
11.2x
0.9x
10.25x
0.80x
Mean
20.4x
2.2x
12.01x
2.02x
Median
16.9x
1.4x
11.99x
1.07x
P/Diluted EPS
Before Extra LTM Latest
P/TangBV LTM Latest
NTM Forward P/E
P/Book Value Per Share
317.95
82.83
169.28
138.17
238.53
47.40
117.61
92.25
122.85
81.35
98.68
95.25
365.84
62.69
167.86
121.45
Summary Statistics
Implied COF Price
High
Low
Mean
Median
Ratios
P/Diluted EPS Before Extra LTM - Latest
P/TangBV LTM - Latest
NTM Forward P/E (Capital IQ)
P/Book Value Per Share
Multiples
Value
Weights
138.17
92.25
95.25
121.45
Weighted Average value
Source: Capital IQ
Implied Value
13.81717962
36.89924547
28.57547938
24.28975154
10%
40%
30%
20%
$
103.58
Technical Analysis (3 years)
Source: Bloomberg
Financial Valuation
1) Forecast Assets, Debt(liabilities) and Equity growth based on company’s
historical data and macro economy
2) Calculate Interest Income, Non-Interest Income, Interest Expense and
Non- Interest Expense
3) Forecast and calculate Net Income for common-shareholders
4) Calculate EPS
5) Calculate and Forecast Dividend per share
6) Calculate the Payout Ratio
7) Calculate WACC
8) Select terminal Growth Rate
9) Discount Dividend per share of Future to calculate the Present Value using
Dividends Discount Method (DDM)
10) Compare with other methods
Weighted Average Cost of Capital(WACC)
Cost of equity using CAPM
Beta
1.1
Market ri sk premi um (Rm-Rf)
7.87%
10 year treasury yei l d
2.33%
Cost of equi ty usi ng CAPM
10.990%
Weighted average cost of capital calculation
Cost of debt
2.28%
Cost of equi ty usi ng CAPM
10.99%
50.00%
Real Rate of Return
8.52%
50.00%
Cost Of Equi ty
9.76%
Market val ue of debt
42,246.00
Market val ue of equi ty
47,447.70
Wei ght of debt
47.10%
Wei ght of equi ty
52.90%
Tax rate
31.56%
Di scount Rate
Calculated WACC
5.90%
6.90%
Anal yst's Ri sk Premi um(+1%)
Beta Calculation
Beta (Bl oomberg)
1.105
Beta (Googl e Fi n)
Beta ( Yahoo Fi n)
1.19
1.29
Beta ( Nasdaq)
0.94
Adjusted beta esti mate
1.10
Dividend Discount Method(DDM) Valuation
Terminal Growth Rate
Discount Rate
6.90%
Dividend
2014
1.21
2015
2.13
2016
2.99
2017
3.93
PV of Dividends
1.991853556
2.620623454
3.215694778
85.02905215
Payout Ratio
Retention
15%
85%
22%
78%
25%
75%
32%
68%
ROE
net income
Equity
ROE
g
3.00%
4,685,269.00
50,092,800
9.35%
7.9%
PV per share
5,716,028.18
62,616,000
9.13%
7.1%
$92.86
7,145,035.23
75,139,200
9.51%
7.1%
7,395,111.46
78,520,464
9.42%
6.4%
Institutional Investors/Analysts’ Recommendation
Firm
Analyst
Action
Recommendation
Tgt Px
Buckingham Research Group
David Hochstim
M
buy
93
Rafferty Capital Markets
Richard X Bove Sr
M
buy
107
Deutsche Bank
David Ho
N
buy
92
Nomura
Bill Carcache
D
neutral
86
Sanford C. Bernstein & Co
Kevin St Pierre
M
outperform
92
Evercore ISI
Bradley Ball
M
buy
94
Morningstar, Inc
Daniel Werner
M
hold
Argus Research Corp
Stephen Biggar
M
hold
Barclays
Jason M Goldberg
M
overweight
Edward Jones
Jim Shanahan
M
buy
Ameriprise Advisor Services, Inc
Lori Wilking
M
buy
Oppenheimer & Co
Ben Chittenden
M
outperform
William Blair & Co
Robert P Napoli
M
market perform
93
94
UBS
Matthew Howlett
M
buy
93
Credit Suisse
Moshe A Orenbuch
M
neutral
90
Goldman Sachs
Ryan M. Nash
M
buy/attractive
92
RBC Capital Markets
Jason Arnold
M
outperform
86
JPMorgan
Richard Shane Jr
M
overweight
95
Janney Montgomery Scott LLC
Sameer Gokhale
M
neutral
86
Robert W. Baird & Co
David A George
M
outperform
90
FBR Capital Markets
Scott Valentin
M
outperform
94
Sandler O'Neill & Partners, LP
Christopher R Donat
M
hold
85
Wells Fargo Securities
Matthew H Burnell
M
outperform
Guggenheim Securities LLC
David W Darst
M
buy
Portales Partners
William H Ryan
M
sector perform
Susquehanna Financial Group
James E Friedman
M
neutral
EVA Dimensions
Neil Fonseca
D
underweight
Drexel Hamilton LLC
David B Hilder
M
buy
92
Keefe, Bruyette & Woods
Sanjay Sakhrani
M
outperform
100
Average
$ 93.22
Source: Bloomberg
95
85
Recommendation
Current Price: $81.14 (11/17/2014)
 Implied Intrinsic Value: $ 92.86

Credit Card Companies : Stock Prices
pre- and post-recession
Change in Stock Prices for leading Card Issuers
AMEX
CHASE
COF
KBW Bank
Index
Source : Google Finance
Bank of
America
CITI
Credit Card Outstanding
$B
US Consumer Outstandigs – Revolving
Credit (Primarily Credit Card debt)
$1100
$1000
$900
$800
$700
$600
200
6
200
7
200
8
200
9
201
0
Source : Federal Reserve (http://www.federalreserve.gov/releases/g19/HIST/cc_hist_r_levels.html)
201
1
201
2
201
3
201
4