Capital One: Financial Winner
Broad market indices ended lower, after the Commerce Department announced that the U.S. gross domestic product declined at an annual rate of 0.1% during the fourth quarter, slowing from a growth pace of 3.1% in the third quarter. A decline in the growth rate was expected, in light of the damage caused by Hurricane Sandy, however, the consensus among economists was for the economy still to grow at a rate of 1% during the fourth quarter, according to Briefing.com.
On a brighter note, Automatic Data Processing said that the U.S. added 192,000 private sector jobs during January, increasing from a downwardly-revised 185,000 in December. Moody's Analytics economist Mark Zandi said that "monthly job gains appear to have accelerated from near 150,000 to closer to 175,000," with increased construction hiring "more than offsetting the weakness in manufacturing." However, Zandi also said that "the recent gains may be overstating any improvement, particularly in the context of recent revivals in growth at the start of the past three years."
Also on Wednesday, the Federal Reserve Open Market Committee released its statement, saying the central bank would continue to purchase mortgage backed securities at a pace of $40 billion per month, while also purchasing $45 billion in long-term U.S. Treasury securities each month. The Open Market Committee acknowledged that "growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors."
The committee painted a rosier overall picture, saying that "employment has continued to expand at a moderate pace" and that "household spending and business fixed investment advanced, and the housing sector has shown further improvement."
The KBW Bank Index (I:BKX) rose slightly to close at 53.94.
Shares of Capital One have pulled back 2% year-to-date, following a 38% return during 2012.
The shares trade for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for a relatively low 8.2 times the consensus 2014 earnings estimate of $6.92 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $6.53.
Capital One on Jan. 17 reported disappointing fourth-quarter results , with earnings available to common stockholders of $1.41 a share, missing the consensus estimate of $1.59. CFO Gary Perlin blamed "seasonal expense and margin trends" for the company's sequential earnings decline, but also said that "fourth quarter 2012 results give us a good picture of what to expect in terms of pre-provision earnings in 2013."
"Pre-provision earnings" refers to earnings before a bank's quarterly provision for credit losses, which is the amount of money added to loan loss reserves.