Capital One's mixed quarter doesn't change our view on its budding transformation

CNBC Finance

7 min read

Shares of Capital One dipped on Thursday evening after the credit card issuer's fourth-quarter earnings per share missed estimates due to higher expenses. The results don't change our positive view of where the company is headed. Revenue in the fourth quarter ended Dec. 31Â increased 53% year over year to $15.62 billion, beating the $15.48 billion consensus estimate of analysts surveyed by LSEG. Adjusted earnings per share increased 25% year over year to $3.86, missing the $4.11 estimate, LSEG data showed. Bottom line For the first time since starting our Capital One position last March, the company missed earnings estimates. There was a slightly larger-than-expected increase in provisions for credit losses, but the company's credit metrics were generally solid and in line with seasonality. Provisions for credit losses are funds that Capital One sets aside to cover potential loan defaults; the higher the provisions, the worse the credit quality signal. But we're not seeing any red flags. It was another quarter in which Capital One made progress on its $35 billion acquisition of Discover. The integration is still in its early stages, but everything looks to be on track. Capital One began migrating its debit cardholders to the Discover network last August, and CEO Richard Fairbank said on the call that the conversion is nearly complete. On the credit side, management expects to move over some of these volumes early next year. And in the background, Capital One is working to increase Discover's international acceptance and strengthen its network brand. While this is happening, Capital One announced this evening that it is buying Brex, a fintech company, for $5.15 billion. More on this later. One more item to note is the company's reaction to President Donald Trump's proposed 1-year cap on credit card interest rates at 10%. Many bank executives, including JPMorgan's Jamie Dimon ,Â have expressed concerns about this plan. Fairbank was no fan either, saying a cap would make credit much less available for consumers. He predicted a cap on rates "would catalyze a number of unintended consequences." A rate cap on credit cards requires congressional approval. One possible solution is to create special products that meet the cap. COF 1Y mountain Capital One 1-year return Capital One stock is down about 3% to $227 in after-hours trading, but our long-term thesis remains intact. We've long believed the Discover acquisition will improve Capital One's earnings power and help re-rate its price-to-earnings multiple as the business model evolves to more closely resemble American Express . The Brex deal was a surprise, but it makes the company look even more like AmEx. Capital One currently trades at roughly 11.3 times 2026 EPS estimates, while American Express trades at about 21 times. We're not calling for parity, but a slightly higher multiple for Capital One would get us closer to our $270 price target. That said, we may not be ready to repurchase the 60 shares we sold at around $242 late last year. Even though a rate cap is unlikely to go into effect, this overhang may linger on the stock until it's fully out of the headlines. Until we see some more smoke clear, we are keeping our rating at a 2 . Deal updates First off, the company said it made progress on the Discover integration and post-merger value gains in the quarter, keeping it on track to meet its expected targets. The deal closed last year, and Capital One is on a path to unlocking $2.5 billion in net operational efficiencies, comprising cost savings and revenue synergies from moving its debit business and some of its credit business onto the Discover network. Keep in mind that the deal also includes integration costs expected to be somewhat higher than $2.8 billion to support new growth opportunities and scale a global payments network. There's also always a risk that Fairbank becomes more aggressive in pursuing opportunities and takes that number even higher, which could result in short-term pain. If the Discover deal wasn't enough, Capital One also announced its purchase of Brex for $5.15 billion in a half-cash, half-stock deal expected to close in the middle of the year. Brex offers business credit cards, spend management software, and banking as an integrated platform. Its customer list focuses on tech startups and fast-growing companies, including Anthropic, Coinbase , TikTok, Robinhood , CrowdStrike , and DoorDash . "Our announcement today represents an important step change towards our business payments destination in a broader marketplace that we believe is ripe for reinvention," Fairbank said on the earnings call. Why we own it Capital One's acquisition of Discover is a transformative deal with significant strategic advantages and financial benefits. There are also several billion dollars worth of expenses and network operational efficiencies that should make this deal highly accretive to earnings per share. Lastly, the acquisition strengthens Capital One's balance sheet, allowing for aggressive share repurchases in the future. Competitors : American Express , MasterCard , Visa Most recent buy : July 31, 2025 Initiated : March 6, 2025 One interesting thing about the deal price is that Brex was previously valued at more than $12 billion in 2022. Like many other fintech companies whose growth benefited from the pandemic, Brex's valuation has come down to earth. More importantly, the deal makes Capital One more competitive in the corporate-card market, further aligning its business model with that of rival American Express. "Brex brings exactly what Capital One needs to accelerate what we've been building. Brex opens up the opportunity in the corporate liability part of the marketplace, where our presence is currently much smaller than it is in the personal liability space," Fairbank added. The company also said it can leverage Brex's spend management tools to enhance its personal card and small-business offerings.Â "Brex gives us the capabilities to unlock a national small business banking opportunity," Fairbank said, adding that Brex will strengthen its travel business, which is an important growth unit at Capital One. Capital One said the deal carries $950 million in transaction-related costs, including deal costs, integration costs, and retention compensation incurred over the next few years. The deal also won't impact the Discover integration or expected net value creation. Commentary Overall, the credit metrics were solid. There was a $302 million reserve build in the quarter, which negatively impacted earnings compared to the third-quarter release. It was largely driven by a build in its domestic card business, driven by seasonal loan growth. The domestic card charge-off rate for the fourth quarter was 4.93%, up 30 basis points from the third quarter due to seasonality. Compared to the fourth quarter last year, the net charge-off rate was down 113 basis points. Net charge-offs refer to the amount of debt a bank has written off as uncollectible, minus any recoveries; a decline is a good thing. Within its consumer banking business, auto net charge-offs were 1.82%, down 50 basis points year over year and up 28 basis points from the third quarter. The company said these trends were in line with expected seasonality. As for buybacks, Capital One stepped up share repurchases to close out the year, buying 11.4 million shares for $2.5 billion, up from $1 billion in the third quarter. The purchases were made under a $16 billion authorization announced in October, of which about $14.1 billion remained at year-end. Importantly, Capital One said its expected pace and magnitude of buybacks will not change as a result of the Brex deal. (Jim Cramer's Charitable Trust is long COF. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Capital One's mixed quarter doesn't change our view on its budding transformation

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