Capital One to Buy Hibernia

Investors who closely follow Capital One Financial (COF) shouldn’t be very surprised to hear that the company has agreed this weekend to buy New Orleans-based Hibernia Corporation (HIB), a bank with over $22 billion in assets, for $5.3 billion in cash and stock. The writing for a deal like this has been on the wall for a while. Capital One, which focuses on marketing directly to customers, is seeking to boost its reach by acquiring a regional bank, opening up new avenues for growth.

From an investing standpoint, it makes little sense to bet against Capital One based on this acquisition. The company is run brilliantly, having increased earnings per share at least 20 percent every year since its IPO in 1994. Wall Street will likely sell off COF shares tomorrow, given the company is paying a 24% premium and many will likely question the decision for a direct marketing lender to spend over $5 billion for a bank with branches in Louisiana and Texas.

In such a case, investors who have missed out on Capital One’s magnificent track record thus far should consider stepping up to the plate and buying the stock on any merger-related weakness. The stock trades at only 11 times 2005 earnings, and that valuation will only get more compelling should the stock get hit tomorrow. And who knows, an analyst downgrade or two might spark enough of a sell-off that existing shareholders, such as myself, should consider adding to their positions.

Capital One Shares Crushed After 4Q Report

After blowing earnings estimates out of the water for the first three quarters of 2004, Capital One (COF) fell short last week when it reported fourth quarter profit below the consensus estimate. Shares of COF were slammed, falling 5% after the announcement. The stock also saw analyst downgrades after the earnings miss, much to the delight of shareholders, I’m sure.

The earnings miss was mostly attributable to higher than expected marketing expenses and more money set aside as loan reserves. While Wall Street seems to see this combo of unexpected news as a warning sign, that conclusion makes little sense. While seen as a financial services firm, Capital One is just as much a consumer marketing company. The better job it does of marketing to the public, the more loans it can make, and the more money it pockets.

Unless the advertising dollars were failing to provide an adequate ROI, Capital One’s $511 million in marketing spend for Q4 (which was more than Citigroup and JPMorganChase) will allow it to continue its rapid growth, hardly a bad sign. Higher loan reserves don’t indicate more difficulty in collecting debts, as some are quick to conclude. Rather, more loans outstanding require higher reserves, even when the default rates on such loans remain the same or even decline.

In the mid seventies, COF shares trade at 11 times 2005 earnings. Not bad for a company that has grown earnings per share 20 percent annually since its IPO.

Metris Continues Its Turnaround

Credit card issuer Metris Companies (MXT) continue to be a stellar performer in 2004. Shares of the once financially troubled firm have tripled this year from $4 to $12, greatly contributing to Peridot Capital’s success year-to-date. The stock pulled back to $10 after an analyst downgraded the stock, citing full valuation.

However, the shares have moved back toward the old highs as news of early debt repayment and refinancing of existing debts hit the wires. In addition to the strong operational turnaround orchestrated thus far, any interest expense reductions the company is able to secure, based on the improving performance of its loan portfolio, will serve as yet another catalyst for incremental earnings gains going forward.

With some analysts still bearish on the company’s future, combined with a staggering 24% of the float sold short, there are many reasons to think that Metris shares will continue their march higher in 2005. Contrary to popular belief, it’s not too late to get in, even at the current $11 price tag.