Capital One's stock has faced recent turbulence, primarily driven by economic anxieties and the February jobs report. Despite these challenges, the company's strategic moves aim to position it for future growth. As of February 19, the stock saw a decline of about 10% from its closing high of $209.82, reflecting broader market concerns.
A significant catalyst on Capital One's horizon is its planned acquisition of Discover Financial Services, set to conclude in early 2025. Shareholders from both companies have approved this strategic move, which now awaits the green light from the Federal Reserve and the Office of the Comptroller of the Currency (OCC). This acquisition is pivotal for Capital One as it seeks to enhance its market position and operational scale.
Bank of America analysts have expressed optimism regarding this acquisition, foreseeing it as beneficial to Capital One's earnings. The bank anticipates generating $2.7 billion in pretax synergies, which are expected to boost adjusted earnings per share (EPS) by more than 15% in 2027. Currently, the stock trades at eight times its projected 2027 adjusted EPS consensus estimate, suggesting potential undervaluation.
"A combination of improving credit trends, pending acquisition-related revenue, and expense synergies as well as the potential for increased capital returns provide a cascade of catalysts that should excite investors and can provide near-term upside to Street estimates," stated analysts at Bank of America.
The acquisition aims to elevate Capital One's position in the card issuer rankings, potentially propelling it to the top spot. This strategic shift will enable Capital One to tap into faster-growing, higher-margin opportunities, thus strengthening its portfolio. At the end of 2024, the company had $2.8 billion in dry powder, which it intends to leverage for portfolio upgrades or stock repurchases.
Capital One's robust order trend from the fourth quarter persisted into the first quarter of this year. According to Dover CEO Richard Tobin, this trend underscores the company's resilient performance amidst challenging market conditions. On a recent conference day, Capital One's stock traded up by approximately 0.75% to $206.43, outperforming the S&P 500's 0.43% decline.
Nevertheless, challenges remain in the broader market landscape. The S&P Short Range Oscillator stood at minus 4%, indicating that the market was still technically oversold even after Wednesday's rally. Despite these hurdles, Capital One's stock holds a price target of $210 per share. This target is somewhat conservative compared to the Wall Street consensus price target of $221, as reported by FactSet.