We anticipate Capital One Financial Corporation (NYSE:COF) to beat expectations when it reports second-quarter 2014 results tomorrow, Jul 17 after the market closes.
Why a Likely Positive Surprise?
Our proven model shows that Capital One is likely to beat earnings because it has the right combination of two key components.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, stands at +1.12%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.
Zacks #2 Rank (Buy): Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Buy) and 3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Capital One’s Zacks Rank #2 and ESP of +1.12% makes us confident of an earnings beat on Jul 17.
Factors to Drive Q2 Results
We believe that following the integration of two major acquisitions, Capital One will likely report a decline in the quarter’s operating expenses. However, this could somewhat be offset by an increase in compliance costs and compensation expenses.
Capital One’s credit quality is expected to remain strong. With the overall economic recovery (albeit slow), provision for credit losses would likely decrease.
Moreover, Capital One delivered positive earnings surprises in three out of four trailing quarters, with an average earnings beat of 8.9%.
Also, Capital One’s activities during the quarter were satisfactory enough to win analysts’ confidence. Consequently, the Zacks Consensus Estimate increased nearly 1% to $1.79 per share over the last 7 days.
However, the overall tough industry background, which continued through the second quarter as well, will likely pressurize revenue growth. Further, given the low rate environment, we foresee persistent pressure on Capital One’s interest income.
Other Stocks to Consider
Capital One is not the only firm looking up this earnings season. We also anticipate earnings beat from three other companies in this industry:
- Discover Financial Services (NYSE:DFS) has an earnings ESP of +0.76% and a Zacks Rank #3. It is scheduled to report results on Jul 22.
- The earnings ESP of Credit Acceptance Corporation (NASDAQ:CACC) is +2.39% and it has a Zacks Rank #2. The company is slated to release results on Jul 29.
- Ally Financial (NYSE:ALLY) has an earnings ESP of +3.13% and a Zacks Rank #3. It is slated to report results on Jul 29.