Bank of America Downgrades Capital One Due To Q1 'Sloppiness'

Bank of America has downgraded Capital One Financial Corp. COF from Neutral to Underperform and says that the company’s lackluster Q1 performance is more than just disappointing—it’s sloppy. Analyst Kenneth Bruce says that uncertainty is likely going to limit the upside for Capital One until the company straightens things out.
 

“We are increasingly concerned that the growth in sub-prime credit cards could drive higher losses than is currently factored into either guidance or expectations, which we think would be ill received by the market,” Bruce explains.

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Despite top line and bottom line misses in Q1, management maintained its 2016 credit guidance and optimism about growth.

Bank of America is not quite so optimistic. The firm lowered its 2016/2017 EPS projections from $7.65/8.35 to $7.50/$8.15. Bruce notes that yields have not been moving higher despite a mix shift toward sub-prime. Fee growth has also been disappointing.

Bruce says that he sees paths to both higher and lower EPS for Capital One, but the poor visibility likely means that the market won’t give the stock the benefit of the doubt. In fact, Bank of America has reduced its price target to $69, which is only 8.5x its 2017 EPS forecast.

Capital One is down 2.9 percent in early Wednesday trading.

Disclosure: the author holds no position in the stocks mentioned.