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Capital One (COF) Q1 Earnings: Will the Stock Disappoint?

Capital One Financial Corporation COF is scheduled to report first-quarter 2016 results on Apr 26, after the market closes.    

Last quarter, Capital One’s earnings outpaced the Zacks Consensus Estimate. Results were driven by growth in revenues, partially offset by a rise in non-interest expenses and a surging provision for loan losses.

Notably, Capital One has a decent earnings surprise history. The company has outpaced the Zacks Consensus Estimate in three of the four trailing quarters, with average positive surprise of 0.63%.

So, will Capital One will able to maintain its earnings streak this time as well? Or will higher expenses and pressure on top line continue to weigh on its profitability? Let’s see how the things have shaped up for the company.

The Zacks Consensus Estimate of $1.90 for the first quarter indicates a year-over-year decline of about 3.72%. Also, our quantitative model does not predict an earnings beat. Here is what our model indicates:

Chances of Capital One beating the Zacks Consensus Estimate in the first quarter are low. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen.

Zacks ESP: The Earnings ESP for Capital One is -0.53%. This is because the Most Accurate estimate of $1.89 stands below the Zacks Consensus Estimate of $1.90.

Zacks Rank: Capital One’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be sure of an earnings beat.

Factors to Impact Q1 Results

Operating expenses should rise in the first quarter given an increase in marketing expenses and continued investment in franchise.

Further, provision for credit losses are anticipated to increase as Capital One’s credit quality will remain under strain with a consistent increase in loans and a stressed energy sector. Management also believes that owing to volatility in oil prices, net charge-offs will increase.

On the revenue front, Capital One expects pressure on top line due to runoffs in home loans, compressed margins and sluggish auto loan growth. Nonetheless, projected growth in the Domestic Card loan should continue to ease pressure on the top line.

Also, an increase in commercial loans is anticipated. Therefore, these, along with an improvement in the overall economy, will help revenues to rise

Capital One’s activities during the first quarter failed to win analysts’ confidence, as evident from 6 downward revisions in earnings estimates (versus one upward revision) over the last 30 days. Notably, the Zacks Consensus Estimate has remained stable over the last 7 days.

Stocks That Warrant a Look

Here are a few finance stocks you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Affiliated Managers Group Inc. AMG has an Earnings ESP of +0.68% and carries a Zacks Rank #2 (Buy). It is expected to report results on Apr 26.

Federated Investors, Inc. FII has an Earnings ESP of +2.33% and a Zacks Rank #3. The company will release results on Apr 28.

Legg Mason Inc. LM has an Earnings ESP +7.69% and carries a Zacks Rank #3. It is scheduled to report on Apr 28.

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CAPITAL ONE FIN (COF): Free Stock Analysis Report
LEGG MASON INC (LM): Free Stock Analysis Report
FEDERATED INVST (FII): Free Stock Analysis Report
AFFIL MANAGERS (AMG): Free Stock Analysis Report
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