Key Points
Not only did Capital One miss earnings and revenue estimates, but its credit provision came in higher than expected.
While investors may see this as a sign of a weakening consumer, management says it sees 'resilience.'
Capital One also saw credit metrics improve from the previous quarter.
The credit card company Capital One(NYSE: COF) delivered disappointing earnings results that fell short of Wall Street consensus estimates in multiple ways. The stock fell 1.5% today.
The company reported adjusted earnings per share of $4.42, missing estimates by $0.08. Revenue of 15.23 billion also came up short of estimates of $15.36 billion.
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Capital One also set aside a $4.07 billion provision for credit losses, higher than analysts expected and up 72% year over year.
Whether you own the stock or not, Capital One, like several of the other major Wall Street banks, is a good company to watch because it can provide insights into the economy, particularly how the consumer is holding up.
Capital One is also important because it tends to serve more near-prime and subprime borrowers than some of its main competitors. Are the three earnings misses evidence that the consumer is finally showing fatigue?
The consumer remains resilient
Despite the credit miss, Capital One's management team says they continue to view the consumer as resilient. Investors should also keep in mind that credit is often one of the more difficult line items for analysts to model.
Of the nearly $4.1 billion provision, $3.8 billion covered net charge-offs, which are loan losses the company doesn't expect to recover, and about $230 million went to further build the total allowance for future credit losses.
While the provision is up 72% year over year, it actually fell from the previous quarter. Meanwhile, 30-day delinquencies, a good indicator of new, emerging credit concerns, also fell from the prior quarter and year over year.
"We continue to really feel very good about not only our portfolio performance, but good for the credit outlook of consumers and good for the opportunity to continue to lean in to origination and credit line growth in our business," Capital One's CEO Richard Fairbank, said on the company's earnings conference call. "Once again, it seems like every quarter we're having a conversation just like this. There's a lot of noise in the external environment, but the consumer is showing quite a bit of resilience."
Fairbank did say that if energy prices stay high for a longer period of time, "that would be a real headwind for consumers and probably a drag on the overall macro economy."
Capital One's business is inherently cyclical, given that the company lends to consumers and businesses, which have their ups and downs through the economic cycle. But despite the earnings and credit provision misses, Capital One's customer base still seems to be holding up well.
While I can understand investor concerns about owning a credit card lender if they are also concerned about a potential recession, I do think Capital One is a stock that can be held long-term and generate solid returns.
Fairbank and his C-suite are an incredibly strong management team with decades of experience and who know how to navigate the economic cycle.
Furthermore, I see strong promise once Capital One can fully integrate its $35 billion acquisition of Discover, which brings a payments network that will add a solid stream of annual recurring revenue.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends Capital One Financial and Fair Isaac. The Motley Fool has a disclosure policy.
