Capital One Financial (COF) shares jumped over 4% on January 22 following strong 4Q earnings of $2.49 per share, well above the $2.28 consensus. Average loans grew 8% in 4Q19, up from 4% in 3Q19. The net interest margin also expanded on a better lending mix.
Credit quality, often a large swing factor in earnings, remained strong, with net charge-offs of 2.60% of average loans in 4Q, which is lower than we'd expect at this point in the credit cycle.
In what we view as a substantial new growth opportunity, Walmart and Capital One began a long-term credit card program in mid-2019 in which COF will be the exclusive issuer of Walmart's private-label and co-branded credit cards in the U.S. COF also acquired Walmart's $9 billion credit card portfolio from Synchrony in 4Q19.
We continue to view operating trends as healthy, including good growth in domestic credit card lending and purchase volumes, increased commercial lending, and continued solid credit quality, and maintained a BUY on the COF shares. Our target price was raised to $119 (from $106), implying a multiple of only 10-times our 2020 estimate.
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