What led to the stock crash: Capital One Financial Corp. (NYSE: COF) stock fell over 5.5% in the pre market session on January 23rd, 2019 (Source: Google finance) after the company posted lower earnings than the analysts’ expectations. The company has reported net income for the fourth quarter of 2018 of $1.3 billion compared with net income of $1.5 billion in the third quarter of 2018, and with net loss of $971 million in the fourth quarter of 2017. For FY 18, COF delivered 41 percent growth in earnings per share, excluding adjusting items.
Performance below Par: COF in the fourth quarter of FY 18 has reported the adjusted earnings per share of $1.87, missing the analysts’ estimates for the adjusted earnings per share of $2.39. The company had reported the adjusted revenue growth of 1 percent to $7 billion in the fourth quarter of FY 18, missing the analysts’ estimates for revenue of $7.1 billion. COF has recognized net gains of $74 million on the sales of exited businesses. COF’s gross margin was up 10 basis points, with strong performance in the services businesses, together, up 190 basis points. This was mitigated by the expected mix headwind from the IBM Z cycle dynamics. The operating expense was better 5%.
Higher Marketing Expenses: In the fourth quarter 2018, the company’s domestic card ending loan balances were up by about 2% compared to the fourth quarter of last year. Average loans also grew about 2%. Fourth quarter purchase volume rose by 11% from the prior year quarter. Revenue rose 2% from the prior year quarter in-line with average loans. Revenue margin continues to be relatively stable at 16%. Non-interest expense was up about 18% compared to the prior year quarter due to higher marketing. The marketing investments are driving strong growth in new accounts and purchase volume. Loan growth is well below new account growth as the company remain cautious on credit lines at this point in the cycle. Credit trends has continued to be a driver of domestic card results in the fourth quarter. The charge-off rate for the quarter was 4.64% down 44 basis points year-over-year. The 30 plus delinquency rate at quarter end was 4.04%, which is up 3 basis points from the prior year. Supply of credit card continues to settle out a bit. Against that backdrop, the domestic card business continues to gain momentum. The company is booking double-digit purchase volume growth. The company are seeing traction in digital and product innovation and the investments in marketing are driving strong growth in new accounts.