Capital One beats on earnings, flexes momentum ahead of closing Discover deal

Capital One shares rose Tuesday evening after the company posted better-than-expected first-quarter profits, driven by beats on credit quality. With the Discover acquisition set to close in less than a month, more gains for the stock could be ahead. Revenue in the three months ended March 31 increased 6.4% year over year to $10 billion, slightly missing the consensus estimate of $10.06 billion, according to LSEG. Adjusted earning per share (EPS) totaled $4.06, exceeding the $3.71 estimate, LSEG data showed. On an annual basis, adjusted EPS increased 26%. Capital One shares jumped about 3 % in after hours trading to around $175 per share. Such a move would extend its week to date gains to about 7.5%. U.S. stock futures also surged Tuesday evening after President Donald Trump said he has ” no intention ” of firing Fed Chair Jerome Powell. The president also acknowledged that tariffs on China will not remain as high as 145%, although the timing of when they could come down was unclear. COF YTD mountain Capital One’s year-to-date stock performance. Bottom line Capital One posted solid first-quarter results and a larger-than-expected reserve release in its credit card business should ease some near-term concerns about its customers’ ability to pay off their balances. More importantly, the business has momentum ahead of the closing of its $35 billion acquisition of Discover . We continue to believe the benefits of this deal to Capital One’s stock will be dual-sided. Not only is it highly accretive to earnings per share through network and expense synergies, but we also argue that it could be price-to-earnings multiple enhancing. For example, Capital One’s soon-to-be vertically integrated business model would look a lot more like American Express , which also owns a payments network like Discover. Shares of American Express trade at about 14.5 times estimated 2026 earnings per share, while COF trades at roughly 9 times forward earnings. We’re not arguing Capital One should trade at the same multiple that American Express does, but there’s a compelling case that the discount should narrow. With the earnings accretion and acceleration in share repurchases from the deal still underappreciated by the market, we reiterate our buy-equivalent 1 rating and price target of $210 a share. We most recently added to our position on Monday. Capital One Financial Why we own it : Capital One’s acquisition of Discover Financial Services is a transformative deal with significant strategic advantages and financial benefits. We expect the deal will create value for merchants, small businesses, and consumers. There are also several billions of dollars worth of expense and network synergies that should make this deal highly accretive to earnings per share. Lastly, the acquisition strengthens Capital One’s balance sheet, allowing for aggressive share repurchases in the future. Competitors : American Express, MasterCard, Visa Most recent buy : April 21, 2025 Initiated : March 6, 2025 Commentary Capital One’s shares have taken a hit amid recent tariff tensions — not due to direct exposure to higher tariffs, but because a slowing economy could threaten its credit performance. But as the first quarter results showed, the credit quality here was better than expected. As the chart above shows, both net charge-offs and provisions for credit losses came in below expectations, leading to a bigger reserve release than expected. At quarter end, Capital One’s total allowance for credit losses stood at $15.899 billion, representing a coverage ratio of 4.91%. That’s down five basis points from the fourth quarter of 2024 thanks to improving loss trends. These metrics are relevant to Capital One because it also has a banking arm, even if its credit card business is much larger and more associated with the company. Net charge-offs refer to the amount of debt a bank has written off as uncollectible, minus any recoveries. Provisions for credit losses are funds that Capital One sets aside to cover potential loan defaults. Lastly, the allowance coverage ratio measures how much the bank has to reserve to absorb potential losses – it’s calculated by dividing the total allowance for credit losses into total loans held for investment. In its card portfolio, Capital One saw improving delinquency rates and payment rates, along with lower delinquency entries — all good signs for any investor worried about its customers’ financial health. “Delinquencies are the best leading indicator,” CEO Richard Fairbank said on the call. “Our delinquencies were stable on a seasonally-adjusted basis throughout most of 2024. And … they improved relative to our seasonal expectation over the last six months.” More recently, Fairbank called out an uptick in spending in recent weeks. He explained some of this could be explained by the timing of the Easter holiday, but there was also strength in retail spending and in auto purchases, which are likely due to a pulling forward ahead of tariffs. As for where spending has eased, Fairbank called out travel and expense growth and airfare. Fairbank also offered additional commentary on the overall economic landscape, arguing that the U.S. consumer “remains a source of strength in the economy.” While he acknowledged that “some pockets of consumers are feeling pressure” from inflation and higher interest rates, he said the company is “still seeing delayed charge-off effects from the pandemic, although our improving delinquencies suggest that this effect may be moderating.” On the whole, he called the U.S. consumer “in good shape.” As seen in the chart above, non-interest expense was among the areas where Capital One missed expectations, but some of that was attributed to a $110 million pretax expense related to Discover integration costs. Higher marketing expenses were another driver of the increase. The company spent more on direct response marketing, media spend, and investment in premium benefits and differentiated customer experiences like airline lounges, travel portal, and Capital One Shopping. Deal outlook Following last week’s regulatory approval, Capital One is on track to close its acquisition of Discover on May 18. The company said Tuesday that it continues to expect it will achieve the originally announced synergies estimated at the time the deal was announced, though the timing of achieving them will be pushed out by about six months due to the delay in closing. Still, the deal synergies are significant. As a reminder, management expects the transaction will generate a total of $2.7 billion in synergies, split between $1.5 billion in expense synergies and $1.2 billion in network synergies, a result of moving Capital One’s debt purchase volume and selected credit card purchase volume to the Discover network — reducing the amount of fees it pays out to Mastercard and Visa. After the deal closes and Capital One completes the Federal Reserve’s annual Comprehensive Capital and Analysis Review (CCAR), we should start to see the company begin aggressively returning excess capital to shareholders. (Jim Cramer’s Charitable Trust is long COF. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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