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Analyst Keen on Capital One's Cross Sell Opportunities

Credit card giant Capital One Financial Corp. has diversified its business by purchasing banks that have active mortgage units lately, and that's a good thing, an analyst at A.G. Edwards says.

Capital One is the nation's fifth largest bank card issuer, ranked by managed credit card loans. The company managed $106 billion of credit card loans at the end of last year, A.G. Edwards noted in a recent report.

"Capital One has grown rapidly by applying its proprietary database-driven mass marketing technique named Information-Based Strategy," analyst Paul Hamilos said in a report on the company.

He said that strategy should continue to help Capital One achieve "competitive advantage in finding profitable segments in consumer finance," particularly in automobile financing and installment loans.

He also noted that the company is expanding internationally with units in the United Kingdom and Canada.

Capital One's recent acquisitions of Hibernia and North Fork, both of which have experience in the mortgage industry, also work in the company's favor, Mr. Hamilos wrote. The $14.6 billion deal to acquire North Fork has yet to close.

Capital One recently announced a $2 million affordable housing venture to serve Texas and Louisiana, demonstrating the company's interest in housing finance in the wake of the Hibernia deal.

Moreover, the branch acquisition that comes with those two acquisitions could make Capital One an attractive merger or acquisition candidate itself, Mr. Hamilos said. But he doesn't foresee a deal in the near term, expecting Capital One's leadership to continue to focus on growing the enterprise.

He said that with those acquisitions, he believes that Capital One should trade at a price-to-earnings multiple consistent with that of other large banks. With the stock currently trading at just under 11 times estimated 2006 earnings per share, it is trading below other large-capitalization banks, which currently average a multiple of 12 to 12.5 times earnings.

A.G. Edwards gives Capital One's stock a 12-month price target of $98, representing a multiple of 12.1 times its estimated 2007 earnings.

Risks to the positive outlook include an economic downturn, higher credit losses, an unexpected disruption in the asset-backed securities market, execution problems related to recent acquisitions, and unfavorable changes in regulations and laws affecting the company's business, according to the report.

AT A GLANCE: Capital One's Stock Price

6/09 Open $83.0

52-Week Range $71.15 - $90.04

A.G. Edwards Target $98

Source: Yahoo! Finance and A.G. Edwards (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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