MW Capital One's stock looks like a bargain following Discover acquisition

By Philip van Doorn

Capital One will be even more focused on credit-card lending now that it has completed the Discover deal

$Capital One Financial Corp(COF-N)$. announced Sunday it had completed its acquisition of Discover Financial Services, ending a long regulatory approval process after announcing the merger agreement in February 2024.

Through Friday, Capital One's $(COF)$ stock had returned 10.9% for 2025, while Discover shares had returned 16% as investors became more confident the deal would be completed. The KBW Bank Index had returned 2.8% so far this year. Those figures include reinvested dividends.

Investors might be wondering whether or not the postmerger Capital One is now fully valued. In a note to clients on Sunday, Keefe, Bruyette & Woods analyst Sanjay Sakhrani rolled out his firm's 2027 earnings-per-share estimate of $22.42 for the postmerger Capital One.

Capital One's stock closed at $197.22 on Friday. So if we use KBW's 2027 EPS estimate, Capital One would be trading at a price-to-earnings ratio of 8.8 - a low valuation, as you can see from the table below.

Forward price-to-earnings ratios are typically based on consensus earnings estimates for the following 12 months among analysts working for brokerage or research firms. But Capital One will go through a transition as it integrates Discover. This will shift Capital One more toward credit-card lending. Card loans made up 49% of the bank's average loans held for investment during the first quarter. And along with Discover's card loan portfolio, Capital One now owns Discover's payment-processing network, which handles Discover-branded card transactions. American Express Co. $(AXP)$ also has its own processing system.

Based on their March 31 financial reports, the combined Capital One and Discover had $638 billion in total assets, ranking eighth among the largest U.S. bank holding companies. So here are the largest 20 U.S. banks, with two P/E ratios - the customary forward P/E using the consensus estimates among analysts polled by FactSet for the next 12 months, which is marked "NTM," and one based on consensus 2027 EPS estimates.

   Largest 20 U.S. banks              Ticker  City                Forward P/E - NTM  Price/ consensus 2027 EPS estimate  Total assets ($bil) 
   JPMorgan Chase & Co.               JPM     New York                         14.7                                12.6               $4,358 
   $Bank of America Corp(BAC-N)$.              BAC     Charlotte, N.C.                  12.0                                 9.3               $3,349 
   Citigroup Inc.                     C       New York                          9.9                                 6.6               $2,572 
   Wells Fargo & Co.                  WFC     San Francisco                    13.0                                 9.9               $1,950 
   Goldman Sachs Group Inc.           GS      New York                         13.9                                11.2               $1,766 
   Morgan Stanley                     MS      New York                         15.5                                13.1               $1,300 
   U.S. Bancorp                       USB     Minneapolis                      10.2                                 8.5                 $676 
   Capital One Financial Corp.        COF     McLean, Va.                      11.7                                 9.1                 $638 
   PNC Financial Services Group Inc.  PNC     Pittsburgh                       11.5                                 9.3                 $555 
   Truist Financial Corp.             TFC     Charlotte, N.C.                  10.2                                 8.4                 $536 
   Charles Schwab Corp.               SCHW    Westlake, Texas                  20.0                                14.9                 $463 
   Bank of New York Mellon Corp.      BK      New York                         13.2                                10.8                 $441 
   State Street Corp.                 STT     Boston                           10.3                                 8.4                 $373 
   American Express Co.               AXP     New York                         19.2                                15.0                 $282 
   Citizens Financial Group Inc.      CFG     Providence, R.I.                 10.5                                 6.8                 $220 
   Fifth Third Bancorp                FITB    Cincinnati                       10.8                                 8.9                 $213 
   M&T Bank Corp.                     MTB     Buffalo, N.Y.                    11.3                                 9.1                 $210 
   Huntington Bancshares Inc.         HBAN    Columbus, Ohio                   11.1                                 9.2                 $210 
   Ally Financial Inc.                ALLY    Detroit                           9.0                                 6.0                 $193 
   KeyCorp                            KEY     Cleveland                        11.2                                 8.7                 $189 
                                                                                                                             Source: FactSet 

The average forward P/E ratio for these 20 banks is 12.5, while the average P/E based on Friday's closing prices and consensus 2027 EPS estimates is 9.8. Capital One trades at a forward P/E of 11.7 and at 9.1 times the consensus 2027 EPS estimates, which is slightly above the 8.8 valuation based on KBW's 2027 EPS estimate.

To add some more perspective to the valuations, the S&P 500's forward P/E valuation is 21.6, based on consensus 12-month EPS estimates weighted by market capitalization. Over the past 20 years, the index's average forward P/E has been 16.6, according to FactSet.

For the banking-industry group within the S&P 500 SPX, the current forward P/E is a weighted 12.2, and the 20-year average has been 11.5, according to FactSet. The banks currently trade for 56% the valuation of the full S&P 500, while they have traded at an average valuation of 69% over the past 20 years. So the banks appear relatively inexpensive - and Capital One even more so.

"With shares trading at a material discount to bank peers on average, we believe COF warrants a more in-line multiple given the potential for higher levels of capital return, asset diversification, and deposit funding similar to regional banks, and leverage to a rising interest rate environment," Sakhrani wrote.

The analyst called his 2027 EPS of $22.42 his "base case" for Capital One but added that there was "$30 of potential EPS power" that year depending on cost synergies, "normalization" of credit quality for the Discover card portfolio to its pre-2020 state and a reduction of the share count through stock buybacks.

The consensus price target for Capital One among analysts polled by FactSet was $216.32 before the open on Monday. Wall Street analysts typically set 12-month targets. The target was 10% higher than Capital One's closing price on Friday. But in this case, 12 months might be too short a period for long-term investors.

Sakhrani called the merger "a transformative deal that will benefit shareholders for the next several years." He added: "There remains significant upside potential of around 15%-50%."

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-Philip van Doorn

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May 19, 2025 08:28 ET (12:28 GMT)

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