Capital One's Credit Headwinds Are Reversing, Oppenheimer Says In Upgrade

While Capital One Financial Corp. COF's results have been dented by credit card delinquencies, an Oppenheimer analyst sees improvement on the horizon. 

The Analyst

Analyst Ben Chittenden upgraded Capital One from Perform to Outperform and set a price target of $113, suggesting roughly 22-percent upside.

The Thesis

The wait for the "coiled spring of earnings improvement" at Capital One may be coming to an end as the credit card issuer's delinquency formation improves and investors hold muted expectations for the second quarter, Chittenden said in the upgrade note. (See the analyst's track record here.) 

" ... We think the credit headwind will turn to a tailwind for the near term," the analyst said.

Oppenheimer expects Q2 to mark a turn in investor perception of credit headwinds. 

Chittenden also pointed to industry tailwinds, such as tax savings helping consumers to pay down debt, which he said is slowing loan growth and helping credit.

The recent sale of Capital One's remaining mortgage assets to DLJ Mortgage Capital will impact future quarters and years, Chittenden said. The impact on net interest income is minor, but the freed-up capital is likely to be deployed in more profitable avenues, he said. 

Oppenheimer raised its Q2 earnings per share estimates from $2.68 to $2.86, and from $10.61 to $10.87 for 2018 as a whole. 

"We can imagine that 2Q will lead to both a positive EPS revision cycle as well as multiple expansion," the analyst said. 

"It will likely play out over the remainder of 2018 and into 2019."

The Price Action

Capital One shares were trading up 3.15 percent at $95.84 at the time of publication Monday.

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