Obscenely Profitable Stock

In my continuing series, “here’s an obscenely profitable stock that I don’t own,” I bring you Capital One Financial (COF).
They’re one of the major credit card companies (David Spade, “what’s in your wallet?”). The company is massively profitable.
Capital One uses a combination of heavy mass marketing and pinpoint datamining. They know exactly who to lend to and how much. Despite their aggressive marketing, the loan portfolio has actually been fairly conservative.
I often hear people complain about junk mail from credit card companies. The companies do it for a highly sophisticated and complex reason. It works.
Capital One grew so quickly that the market assumed something had to be wrong. Four years ago, banking regulators demanded tighter controls and the stock cracked. But the company stood by its loan portfolio, and the results speak for themselves.
Here’s their earnings-per-share for the past few years: $0.77, $0.93, $1.32, $1.72, $2.24, $2.91, $3.93, $4.92, $6.21 and $6.73. Constant growth.
The company forecast earnings this year of $7.40 to $7.80 a share, which translates to growth of 10% to 16%. It also means that at today’s price, Capital One is going for 11.0 to 11.6 times this year’s earnings. That’s very cheap, and if that isn’t enough, you also get a teeny dividend.
One of my worries, however, is that the company recently completed a major merger with Hibernia bank. I always get nervous about growth-through-acquisition strategies.

Posted by Eddy Elfenbein on February 14th, 2006 at 1:00 am

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