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2012 Preview: Capital One Financial

With 2011 nearly in the books, it's time to reflect on what has transpired this year and which companies could be facing business-altering decisions in 2012. On today's plate we have Capital One Financial (NYSE: COF  ) , one of the largest credit-card issuers in the U.S.

But before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot of how 2011 treated shareholders:

Year-to-Date Return 0.6%
Price-to-Earnings 5.7
Price-to-Sales 1.4
Cash/Debt $8.5 billion / $35.3 billion
Projected 5-Year Growth Rate 7.5%
Forward P/E 7.0

Source: Yahoo! Finance.

Despite it being a relatively unkind year for financials, Capital One held up pretty well. Compared to large money center banks like Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Wells Fargo (NYSE: WFC  ) , Capital One relies much more heavily on its credit card division and less on its mortgage lending and investment service divisions. This was a formula that worked for the company in 2011, and the stock moved marginally higher. But that's the past. Let's look ahead and see what could be driving Capital One's stock price in 2012.

What to expect
Because of Capital One's reliance on its credit division for roughly 80% of its revenue, credit card delinquencies and the health of the housing market are likely to take the stage in driving the company's stock price. Just yesterday, new data showed that credit-card delinquencies rose in November by 17 basis points to 5.38%. Although delinquencies remains near historic lows, with such a great reliance on its customers' ability to pay back loans, Capital One shareholders have to view this news with at least some worry.

The continued disaster that is the housing market also indirectly plays a role in the health of Capital One. Many housing stocks, like PulteGroup (NYSE: PHM  ) , which is up 60% in the past three months, ended the year with large run-ups on expectations that the sector is beginning to turn around. But the truth of the matter remains that foreclosure rates are still high and prices remain depressed across the country. With many of the U.S. government's incentives to purchase a house now gone and investors only nibbling despite lending rates hitting 60-plus-year lows, I don't exactly see much to be bullish about in the housing sector in 2012. If default rates on homes rise, it's extremely likely a correlation will develop that will cause Capital One's credit delinquency rates to rise as well.

You might feel it's a surprise that the company is trading for what would seem like a minuscule 5.7 times trailing-12-month earnings. But when you factor in the instability of Europe's banking system and the likelihood that a myriad of austerity measures across Europe could spur a global recession in 2012, the valuation seems considerably fairer -- at least to me.

Foolish roundup
Capital One's success or failure is going to come down to whether or not Capital One's cardholders continue to make their payments in lieu of a poor housing market and a shaky macroeconomic picture. To me there seems to be too much worry built into the stock even at just seven times forward earnings, and that's the primary reason I'm maintaining my underperform rating on CAPS. What's your take on Capital One for 2012?

Share your thoughts in the comments section below and consider adding Capital One Financial to your free and personalized watchlist to keep up on the latest news with the company.

Also, if you're looking for one more great idea to start the new year, consider grabbing yourself a copy of our latest special report, "The Motley Fool's Top Stock for 2012." This report is completely free to you and highlights a company that our analysts have dubbed the "Costco of Latin America."

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. He has way too many points saved up on his credit card. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America, and has created a covered strangle position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's interesting without charging interest.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2011, at 1:50 PM, spunky42 wrote:

    It has been 3-4 years since unemployment spiked and the housing market tanked. While no great improvement in either has been noted, those customers of COF and others still paying their bills on time must be rock solid. Futhermore, any new credit extended over the past several years has been underwritten on much more stringent levels. Consequently, the risk of any real uptick in delinquencies or charge-offs would appear minimum.

    COF is not really trading at a p/e of 5.7x on a ttm basis. Much of 2011 eps is from reserve releases based on lower charge-offs and delinquencies. Everyone knows this is winding down. COF's normalized eps is more like $6 per year right now. Consequently, the p/e looks more like 7x.

    A real key to COF in 2012 and beyond is the Fed approval of the ING and HSBC deals. With ING you get a ton of deposits and no profitable loans. With HSBC you get very profitable loans and no deposits. Either sell or run-off the ING loans and fund the HSBC loans with cheap deposits and presto, the eps potential for COF in coming years changes dramatically.

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