Lately, enough babies have been thrown out with the bathwater on Wall Street to make the Pitt-Jolie clan bullish on all major indexes. Wariness invoked by the contagious equity sell-offs in the financial sector might give pause to some market participants before buying into a credit card issuer's stock, but major credit card providers, specifically Visa (NYSE: V), MasterCard (NYSE: MA), and Discover Financial Services (NYSE: DFS), should sustain liquidity balances sufficiently to remain solvent through 2009.
If Capital One Financial's (NYSE: COF) balance sheet can maintain its fortitude, then investors should seriously consider its prospects. Earnings for the third quarter came in at $1.00 per share, just a penny off estimates, and its Chief Financial Officer, Gary Perlin, assured investors that the group would continue to profit through the current economic decline.
Smooth operators
Based on its track record, shareholders have no reason to doubt that assertion. Management has certainly shown itself capable of operating the company efficiently; through its collections, data utilization, and marketing prowess, it has become a fierce industry competitor.
By way of several acquisitions, Capital One has grown into a well-rounded enterprise that no longer depends entirely on American consumer spending. Now it generates half of its revenue from its non-credit card businesses including diversified banking, global financial services, and automobile finance.
The good
The convenience of debit and credit cards has led to a shift away from checks and cash, and consumers are unlikely to break the habit of reaching for the plastic any time soon.
Furthermore, the expected decline in consumer spending has already been priced-in to Captial One shares, so if actual events result in economic conditions even slightly more favorable than the market predicts, then the company stands to outperform.
The bad
On the other hand, a decline in consumer spending would put pressure on Capital One's revenues, and that trend is already taking place. If adverse economic conditions result in more credit card loan defaults than are expected, then the company will need to make downward adjustments on its future earnings forecasts.
Additionally, the company is exposed to a number of other possible risk factors including increased competition, write-downs of asset portfolios, and the passing of new legislation that would negatively impact the company.
The Foolish takeaway
Quarterly net income of $374.1 million, or $1.00 per diluted share should be enough to satisfy some investors that have already paid in, but based on a conservative estimate using 80% of the five-year average P/E and current consensus earnings estimates, the stock is currently trading around its fair value estimate in the $35 to $40 range.
Identifying a well-run company doesn't always accompany unveiling a good stock buying opportunity, and this Fool suggests would-be investors keep Capital One on the radar while continuing to shop for better bargains.
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