Capital One Shares Crushed After 4Q Report

After blowing earnings estimates out of the water for the first three quarters of 2004, Capital One (COF) fell short last week when it reported fourth quarter profit below the consensus estimate. Shares of COF were slammed, falling 5% after the announcement. The stock also saw analyst downgrades after the earnings miss, much to the delight of shareholders, I’m sure.

The earnings miss was mostly attributable to higher than expected marketing expenses and more money set aside as loan reserves. While Wall Street seems to see this combo of unexpected news as a warning sign, that conclusion makes little sense. While seen as a financial services firm, Capital One is just as much a consumer marketing company. The better job it does of marketing to the public, the more loans it can make, and the more money it pockets.

Unless the advertising dollars were failing to provide an adequate ROI, Capital One’s $511 million in marketing spend for Q4 (which was more than Citigroup and JPMorganChase) will allow it to continue its rapid growth, hardly a bad sign. Higher loan reserves don’t indicate more difficulty in collecting debts, as some are quick to conclude. Rather, more loans outstanding require higher reserves, even when the default rates on such loans remain the same or even decline.

In the mid seventies, COF shares trade at 11 times 2005 earnings. Not bad for a company that has grown earnings per share 20 percent annually since its IPO.

Enjoy this post? Subscribe and never miss another one: RSS | Email | Twitter

Comments are closed.

Post Navigation