Investors are increasingly concerned about the state of U.S. consumers, particularly as rising living costs and reduced savings are forcing many to cut back on spending.

McKinsey reports that consumers are trading down to cheaper alternatives as they struggle to manage their finances.

This has put pressure on companies that depend heavily on consumer spending, especially in sectors like consumer loans and payment processing, where the assumption is that spending will decline, and loan risk will increase.

Capital One Financial (COF) is one of these companies and its stock is trading near the lower end of its historical price-to-book range with 0.8x Uniform P/B.

The company remains a compelling option for investors, despite the concerns surrounding consumer debt.

One key factor is the improvement in the company’s delinquency rates. For instance, in the second quarter of 2024, the rate of loans more than 30 days delinquent dropped from 4.48% to 4.14%.

Consumers, while facing financial pressures, are not defaulting on their debts at alarming rates.

This is a positive sign for the company, as lower delinquency rates mean fewer losses and less need for high provisions against bad loans.

In addition to healthier delinquency trends, the broader economic picture is starting to look more favorable for Capital One.

The Federal Reserve has implemented significant interest rate cuts, which should ease the burden on consumers with outstanding debt.

Lower interest rates could give consumers more flexibility to manage their payments, and this could support Capital One’s loan performance in the coming quarters.

The company’s credit card segment has also shown encouraging growth. In the second quarter of 2024, the company reported a 5% year-over-year increase in credit card purchase volume, outpacing inflation and indicating that consumers continue to spend.

Even with rising provisions for credit losses, Capital One managed to slightly increase its revenue margin, from 17.9% in the second quarter of 2023 to 18% in the same period this year.

Furthermore, the credit quality of Capital One’s customers is improving. The share of cardholders with FICO scores above 660 increased to 69%, up from 68% the previous year.

The company’s current stock price may not fully reflect the improvements in its business.

However, it is important to keep an eye on consumer health, as any economic downturn could pose significant challenges for Capital One.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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