Capital One (COF) Q2 Earnings: Will The Stock Disappoint?

Capital One Financial Corporation (NYSE:COF) is scheduled to report second-quarter 2016 results on Thursday, Jul 21, after the market closes.

Lower-than-expected first quarter earnings – primarily due to higher expenses and provisions – had an adverse impact on Capital One’s stock, as evident from its lackluster performance since the results. For the three months ended Jun 30, 2016, the stock declined over 11%. The sell-off can partially be attributed to the surprise Brexit results. It is also a possibility that the investors found the overall business activity of the company unsatisfactory.

The company saw five downward revisions in earnings estimates (versus two upward revisions) over the last 30 days. Notably, the Zacks Consensus Estimate of $1.87 remained stable over the last 7 days.

Further, Capital One does not have a decent earnings surprise history, as evident from the chart below:

CAPITAL ONE FIN Price and EPS Surprise

CAPITAL ONE FIN Price and EPS Surprise | CAPITAL ONE FIN Quote

Factors at Play

Like the prior quarter, will higher expenses continue to weigh on Capital One’s profitability? Let’s dig into the factors that are likely to impact Q2 results.

Beginning with expenses, management has been optimizing branches, and for this it expects to incur $160 million as branch optimization costs for the whole year. We believe a part of this expense will be recorded in the second quarter as well. Also, operating expenses should rise given an increase in marketing expenses and continued investments in franchise.

Further, provision for credit losses are expected to rise as Capital One’s credit quality will remain under strain, given the stressed energy sector and consistent increase in loans. Management expects net charge-offs to increase owing to continued volatility in oil prices.

On the revenue front, Capital One expects pressure on the top line due to runoffs in home loans and sluggish auto loan growth. Nonetheless, projected growth in the Domestic Card loan should continue to ease pressure on the top line to some extent.

Further, Capital One’s revenue will likely benefit from growth in commercial loans. Also, net interest margin should witness an improvement driven by benefits from interest rate hike in Dec 2015 as well as a rise in loan demand.

Earnings Whispers

Our quantitative model does not predict an earnings beat. Here is what our model indicates:

Chances of Capital One beating the Zacks Consensus Estimate in the second quarter are quite low. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen.

Zacks ESP: The Earnings ESP for Capital One is -1.60%. This is because the Most Accurate estimate of $1.84 stands below the Zacks Consensus Estimate of $1.87.

Zacks Rank: Capital One’s Zacks Rank #3 increases the predictive power of the ESP. However, we need to have a positive ESP to be sure of an earnings beat.

Nevertheless, the Zacks Consensus Estimate for the second quarter indicates year-over-year growth of about 4.82%.

Stocks That Warrant a Look

Here are a few finance stocks you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Earnings ESP for Hancock Holding Company (NASDAQ:HBHC) is +4.55% and it carries a Zacks Rank #3. The company is scheduled to release results on Jul 20.

The Earnings ESP for M&T Bank Corporation (NYSE:MTB) is +0.48% and it carries a Zacks Rank #3. The company is slated to release results on Jul 20.

Federated Investors, Inc. (NYSE:FII) has an Earnings ESP of +2.13% and a Zacks Rank #3. It is slated to report results on Jul 28.