Analysing Consumer Loan Giants: Capital One vs. Discover Capital One Vs. Discover: Is it Time to Buy Stock in These Consumer Loan Giants?

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Inflationary pressures have stressed the market, making many consumer loan stocks more enticing. The Zacks Financial-Consumer Loans Industry has yielded a whopping total return of +32% over the last year, dividends included.

Two noteworthy contenders in this space are Capital One Financialย COFย and Discover Financial Services DFS, which leads to the pertinent question of whether now is the opportune time for investors to consider purchasing stock in these consumer loan giants for potential growth.

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Overview & Compelling Valuations

Capital One and Discover shares had been substantially undervalued for the better part of 2023 subsequent to the collapse of certain financial institutions. Nonetheless, they retain a dominant foothold in consumer lending, particularly in personal and credit loans. Discover also offers home loans, with Capital One focusing on auto loans following the cessation of its mortgage services in 2017.

While both Capital One and Discover shares have experienced a rebound, they are still trading at just 9.6X and 8.9X forward earnings, respectively. This is well below the S&P 500โ€™s 19.6X and closer to the Zacks Financial-Consumer Loans Industry average of 7.5X.

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In terms of price to sales, Capital Oneโ€™s P/S ratio of 1.3X and Discoverโ€™s 1.6X are below the optimum level of less than 2X, and the S&P 500โ€™s 4.2X, with their industry average at 0.9X.

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Comparative Outlook

Capital One and Discover have maintained appealing sales growth, despite the dampening effect of high inflation on their bottom lines in the post-pandemic era.

Looking at Capital Oneโ€™s forecast, earnings for fiscal 2023 stand at $12.79 per share, compared to $17.71 per share in 2022. However, there is a projected rebound in FY24 EPS, expected to rise by 8% to $13.78 per share. Furthermore, total sales are estimated to have increased by 7% in FY23 and are anticipated to rise by an additional 4% this year, reaching $38.36 billion.

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Turning to Discover, annual earnings for FY23 are expected to be $12.27 per share, in comparison to $15.50 per share in 2022. For fiscal 2024, there is an anticipated stabilization and an over 1% increase in earnings, reaching $12.47 per share. Discoverโ€™s total sales are forecasted to have surged by 18% in FY23 and are expected to rise by an additional 6% in FY24, reaching $16.66 billion.

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Recent Total Return Performance

Leveraging the robust performance and resurgence of the Zacks Financial-Consumer Loans Industry over the past year, Capital Oneโ€™s +40% total return has outperformed its Zacks Subindustryโ€™s +32% and the benchmarkโ€™s +24%, while Discoverโ€™s +12% has slightly lagged behind.

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Despite Discoverโ€™s price performance trailing the broader market, its 2.5% annual dividend yield surpasses the S&P 500โ€™s 1.4% and even exceeds its industry average of 2.2%, with Capital One boasting a respectable yield of 1.81%.

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Takeaway

Presently, Capital One Financial and Discover Financial Servicesโ€™ stocks both hold a Zacks Rank #3 (Hold). Their appealing valuations certainly point to potential growth, but this may hinge on the capacity to deliver favorable fourth-quarter results later in the month, with Discover set to report on January 17 and Capital One on January 25.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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