Capital One Financial Corp. (COF)

Capital One has a great big credit card business. Even though the numbers are quite large, this business is remarkably easy to understand. Capital One takes in deposits at its retail and commercial banks and pays a small rate of interest on these "demand deposits." It then uses these deposits and other financing (like $37 billion in long-term debt) to lend to consumers at very high rates of interest via MasterCard- and Visa-branded credit cards. Capital One makes a profit if the money it earns on its loans exceeds what it pays for capital, after all of the other costs of running the business – like the ubiquitous "what's in your wallet" advertising.

Capital One's problems are large and obvious. Its first problem is leverage. The difference between the value of Capital One's investments (~$150 billion in consumer debt) and the value of its obligations (~$80 billion in deposits and $37 billion in long-term loans) is only about $30 billion. That's not much cushion, given the trends in the credit markets. With about 5% of Americans no longer paying their mortgages and piling up record amounts of additional credit-card debt, it's plausible credit-card delinquencies will rise over the next few months. In fact, according to Capital One, that's exactly what's happening. The company recently wrote off $500 million in loans, saying its annualized rate of write-offs had reached 4.11%, up from 3.7% at the end of 2007.

Furthermore, Capital One is particularly vulnerable to a surprising amount of bad debt, simply because it has grown aggressively over the last five years. Loans held from investment have grown from $32 billion to more than $100 billion today. I think the decline in credit quality over that period will prove to be substantial. America has been on an unprecedented credit binge. Like a fireman hosing down a 4 alarm fire -- Capital One has been dumping huge amounts of unsecured credit-card debt on the market. Its loan book grew in excess of 20% every year between 2003 and 2007 – about six times faster than the economy. Meanwhile, the quality of its loans noticeably declined. The company's return on assets back in 2003 was more than 3%. Last year, it was slightly more than half that... 1.79%. Amnazing huh?

As the quality of the company's loans has deteriorated, so has net income... The write-offs have eaten more and more of its profits. Loan losses totaled $1.4 billion in 2006 and $2.6 billion in 2007. How big might these losses grow?

It's predicted (by people smarter then me) that over the next 12 to 18 months, Capital One experiences defaults on more than 10% of its total loan book, resulting in losses of around $15 billion. That would erode a majority of the bank's equity.

This info is enough for me to short this stock. Full disclosure: As of right now, I am not shorting this stock in my regular portfolio.

The risks in the consumer finance sector are grossly unrecognized and under reported. Fragile industry gets battered with a little bad news. Revenue and earnings are down for the quarter. With inflation and a weak economy, unsecured credit will be vulnerable.

The Company continues to beat their loss forecast every month. Also unlike American Express they have secured debt to work with and have planed this happening in advance. I think in the long run they will be one of the few who survive.

Intergration with Hibernia continues to go smoothly even in the wake of Hurricane Katrina and the recent merger with North Fork was just approved yesterday. COF continues to have a vast amount of cash on hand for future expansion into Texas.

COF continues to trade at a very valued multiple and is a good long term play.

i love the acquisitions of hibernia and north fork. from primarily a credit card player, cof has expanded into housing finance, auto finance, and banking. the nfb acquisition will trim their borrowing costs significantly - best of all, this stock is extremely compelling from a value perspective.

Low PEG, they deal mainly with high-end credit users (lower default levels) and are now getting into Banking. Profits will continue to outgrow S&P

Subprime and Credit crises have pretty much bottomed out.

Capital One probably still has some write-downs to take; however, the upshot is that we're in a Recession, consumers are still tapped out (and will be for a while longer), and credit card debt is set to increase. This is when credit card underwriters make money.

Company is also well-positioned to take advantage of government intervention, low interest rates, and a push to refinance various types of consumer debt.

With the market going up their credit card holders were looking a little better financially. With the start of this correction, the old problem of bad debt will become news again. This stock may fall back to its 52 week low.

I am Bullish on financial stocks in general. When you add in being bullish on emerging markets, BBD and HDB seem like ways to play Brazil and India for me. My American stock is COF and sadly there is no ADR for The Royal Bank of Scotland. Personally I don't think there is a bad way to play financial stocks, but I want to believe I have picked the best in each market.

Currently at a great P-E compared to competitors. Secondly, unlike credit cards, who make money on the number of transactions, COF makes money on the actually debt someone has. They lend the money, and are the ones who are making profit off the ridiculously high interest rates. And who doesn't know 1 or 2 or 30 people with credit card debt out the wazoo...

This company is struggling with its credit card portfolio and the way it reats its customers. The customers that stick around are the poor souls that can't leave them. Hence, they will default on their obligation and move on. Bad news for "what's in your wallet."

COF will have big loss on credit cards and commercial loans. They didn't even start writing down their CRE loan loss.

10-yr earn per share growth = 27.5%.
Price of $79.47 & value of $95.45 (11.5 X est '07 earn per share of 8.3) => undervalued by 20%.
Moderate long-term debt of 4.8 x '05 net income
3-5 yr annual return of 25-39%

I have owned COF on and off for 4 years and have seen the price go from $15 to $80 plus.

I think they have a great story. I'm a customer that believes in their services. I have credit cards, auto loans and just opened a high yield saving account.

You could say that I'm a believer and see this stock at a double in 4 to 5 years.

What's in YOUR balance sheet???

This is the next global one-stop shop for financial services. I like their business model that reminds me about the making of Citigroup.

As of close of business on 12/18/2007, this was a 5-star Morningstar stock trading at less than half it's Morningstar fair value.

Well-run company with a great history.

Acquisitions of Hibernia and North Fork appear to be going well, giving access to cheap capital for growth, access to traditional banking customers, as well as diversification of credit risk