Capital One (NYSE: COF) is scheduled to report its fiscal Q2 2021 results on Thursday, July 22. We expect Capital One to edge past the revenue expectations, while the earnings are likely to miss the estimates. The credit card giant outperformed the consensus estimates for revenues and earnings in the last quarter. While the company’s top-line suffered a slight loss in Q1 due to lower net interest income, its noninterest revenues saw some growth. Further, its profitability figures benefited from a drop in provisions for loan losses, which increased the EPS from -$2.21 in the year-ago period to $4.52. We expect the same trend to govern the second-quarter FY2021 results as well.
Our forecast indicates that Capital One’s valuation is around $157 per share, which is slightly above the current market price near $154. Look at our interactive dashboard analysis on Capital One’s pre-earnings: What To Expect in Q2? for more details.
(1) Revenues expected to be just ahead of the consensus estimates in Q2
Trefis estimates Capital One’s fiscal Q2 2021 revenues to be around $7.15 billion, just above the $7.09 billion consensus estimate. It reported revenue of $28.5 billion in 2020, which was marginally below the 2019 figure. While the company’s NII suffered in the year due to a lower interest rate environment and a drop in outstanding loan balances, its non-interest income (excluding the unrealized valuation gain of $535 million on an equity investment) was down due to lower consumer spending levels. Further, the NII continued to suffer in the first quarter of 2021 as well, however, the non-interest income recorded some recovery. We expect the same trend to drive the second-quarter results of FY2021.
Moving forward, we expect the interest rates to remain below the pre-Covid-19 levels for some more time, negatively impacting the NII. However, growth in outstanding loans and some recovery in the consumer spending levels will likely enable COF’s top-line to touch $28.6 billion in FY2021. Our dashboard on Capital One’s revenues offers more details on the company’s segments.
2) EPS is likely to miss the consensus estimates
Capital One’s Q2 2021 adjusted earnings per share is expected to be $4.52 per Trefis analysis, almost 2% below the consensus estimate of $4.61. The company’s net income declined by 54% y-o-y in 2020, due to an increase in provisions for loan losses from $6.2 billion to $10.3 billion. The provisions figure was increased to compensate for the higher risk of loan defaults due to the Covid-19 crisis and the economic slowdown. That said, the company has reduced its provisions over the recent quarters, including a $1.6 billion release in reserves for loan losses in the first quarter. This signals some improvement in the loan repayment capability of its customers. We expect the same trend to continue in the FY2021 Q2 results.
The net income margin is likely to see a major recovery in 2021, mainly driven by a reduction in provisions. It will likely lead to an adjusted net income of $6.6 billion – 2.75x times the previous year’s figure. Overall, it will enable COF to report an EPS of around $14.89 in FY2021.
(3) Stock price estimate marginally more than the current market price
Going by our Capital One’s valuation, with an EPS estimate of around $14.89 and a P/E multiple of just below 11x in fiscal 2021, this translates into a price of $157, which is slightly above the current market price of around $154.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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