The Zacks Financial-Consumer Loans Industry has seen a total return of +32% over the past year, including dividends, as easing inflation has made consumer loan stocks more attractive.
Overview of Valuations
Capital One Financial COF and Discover Financial Services DFS are two prominent consumer loan companies that have been undervalued for much of 2023. Despite their rebound, they still trade below the S&P 500.
In terms of price to sales, Capital One’s P/S ratio of 1.3X and Discover’s 1.6X are below the optimum level of less than 2X, and the S&P 500’s 4.2X with their industry average at 0.9X.
Outlook Comparison
Both companies have shown attractive sales growth, despite high inflation impacting their bottom lines.
Capital One is forecasted to end fiscal 2023 with earnings of $12.79 a share, with a projected rebound in FY24 EPS. Discover is expected to have annual earnings of $12.27 a share for FY23, with a stabilization and increase in fiscal 2024 earnings.
Recent Total Return Performance
Capital One’s +40% total return has outperformed its Zacks Subindustry’s +32% and the benchmark’s +24%, while Discover’s +12% has lagged.
However, Discover’s 2.5% annual dividend yield is notably above the S&P 500’s 1.4% and even the industry average of 2.2%, with Capital One’s yield at a respectable 1.81%.
Conclusion
Capital One Financial and Discover Financial Services both hold a Zacks Rank #3 (Hold). Their undervalued status suggests potential upside, contingent on their ability to deliver favorable fourth-quarter results later this month, with Discover reporting on January 17 and Capital One on January 25.