$COF Q2 Earnings Report

$COF Short

Capital One Financial Corporation is an American bank holding company specializing in credit cards, auto loans, banking, and savings accounts. In many ways, they are very similar to Ally Financial. Over the past year alone, they’ve lost approximately 27% of their stock value. During the previous quarter, although they beat the estimates, their stock still went down 6% due to higher-than-expected market expenses. This report came out back in April before inflation reached a peak or Fed raised the interest rates so this time around, it will be much harder for them to overcome this issue. For this quarter, While quarterly earnings are expected to have decreased as compared to last year, revenues are expected to rise. Capital One’s efforts to strengthen its card operations are expected to have provided a positive change in its revenue. Along with the growth in loan balances due to inflation, higher interest rates are also expected to have positively impacted the company’s income. The consensus estimate for their revenue is $6.5 billion which is 13.6% higher than last year. Something else adding to their revenue is fee income. Supported by the rise in card usage, Capital One’s interchange fee which makes up more than 60% of their income is likely to have also been positively impacted with an estimate of $1.10 billion which indicates a 7.9% growth as compared to last year but I strongly believe that this will be a disadvantage for them this quarter as people have been spending less due to higher prices. However, revenue growth doesn’t mean anything when the EPS is missed as we have seen with many stocks in the past. Capital One has been going through sharp rises in expenses over the past several years because of higher marketing costs. The company’s investment in technology upgrades has also led them to higher costs. These, along with rising inflation, are expected to have resulted in an increase in operating expenses in the second quarter. Adding more, The Zacks Consensus Estimate for Capital One’s second-quarter earnings of $5.10 has been revised significantly lower over the past seven days by a decline of 33.9% from the previous quarter’s reported number which is a very good indication that the company is dealing with high operating costs once again. As many investors are now extra cautious of the companies they have an investment in due to a recession coming up, all eyes are going to be on what Capital One has done to reduce its costs while also maximizing its revenues for future quarters. While beating the current expectations is important, there is no point in making an investment if the company is expected to lose money in the future. There have been no mentions of what Capital One has done to reduce their expenses and as also hinted by estimate revisions, they are still spending heavily on advertising. As we saw in the previous quarter, the company had a big downfall due to this however this time things could get much worse. High-interest rates along with inflation and lower customer spending will also add to their expenses vs profits and investors won’t be too happy if their expenses still haven't changed. To add more to the fire, the company is also 40 billion Dollars in debt which would be very hard to pay off if they go into a recession with very high spending as compared to earnings. Why this stock? In many ways, this stock is similar to Ally which I previously had an accurate report on. They both provide services in the same industry and both have been seeing a decrease in EPS. On top of that, Capital One also has another issue that Ally didn’t have which is high expenses and many revisions of lower estimates. I believe that Capital One will also miss the EPS and disappoint investors.

Initial reaction: Long Researched reaction: Short Top 10 Owners of Capital One Financial Corp Stockholder Stake Shares owned Total value ($) Shares bought / sold Total change Dodge & Cox 8.39% 32,964,956 3,434,618,766 +174,095 +0.53% The Vanguard Group, Inc. 7.92% 31,140,839 3,244,564,015 -63,360 -0.20% Capital Research & Management Co.... 5.36% 21,081,026 2,196,432,099 -997,813 -4.52% SSgA Funds Management, Inc. 5.21% 20,463,407 2,132,082,375 +432,244 +2.16% BlackRock Fund Advisors 4.56% 17,907,015 1,865,731,893 -768,932 -4.12% Davis Selected Advisers LP 2.90% 11,386,174 1,186,325,469 -398,195 -3.38% JPMorgan Investment Management, I... 2.79% 10,976,099 1,143,599,755 +383,116 +3.62% Aristotle Capital Management LLC 2.70% 10,596,286 1,104,027,038 -70,700 -0.66% Fidelity Management & Research Co... 2.68% 10,534,569 1,097,596,744 -3,238,609 -23.51% Managed Account Advisors LLC 2.13% 8,378,427 872,948,309 +2,621,140 +45.53%

Disadvantages of shorting this stock: Considering the fact that they are a bank company, the expectations from other people are much lower due to the number of banks that have previously reported disappointing results and this could result in their stock not going down as much as it should’ve if people were shocked about the results they reported. According to investors, the company is also highly undervalued which would be a great time for investors to buy into the company in the pre-market if their stock drops. CEO: Time: After market close Estimate: -5%