Capital One vs. Ally: Which Credit Services Stock is a Better Buy?

Capital One Financial Corporation (COF) in McLean, Va., is a diversified financial service holding company that offers a range of financial products and services to consumers, small businesses, and commercial clients through branches, the internet, and other distribution channels. It operates through three segments: Credit Card, Consumer Banking, and Commercial Banking. In comparison, Ally Financial Inc. (ALLY) in Detroit, Mich., is a bank holding company that provides various digital financial products and services to consumer, commercial, and corporate customers. It operates through Automotive Finance Operations, Insurance Operations, Mortgage Finance Operations, and Corporate Finance Operations segments.

The credit services industry has suffered in the near-zero interest rate environment and lower consumer spending amid the CVID-19 pandemic. However, the sector has witnessed a solid recovery on the back of increased credit transactions over the past year. Also, the Federal Reserve has announced that it will be reducing its bond purchases and increasing interest rates three times this year to control inflation. These hawkish monetary moves should help credit services companies generate bigger revenues. Therefore, both COF and ALLY should benefit.

COF’s shares have gained 2.2% in price over the past month, while ALLY has lost 1.9%. COF’s 9.7% gains over the past nine months compare with ALLY’s negative returns. Furthermore, COF is the clear winner with 41.3% price gains versus ALLY’s 14.9% returns in terms of the past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Oct. 26, 2021, Richard D. Fairbank, COF’s Founder, Chairman, and CEO, said, "Our modern technology stack is powering our performance and our opportunity, it’s setting us up to capitalize on the accelerating digital revolution in banking, and it's the engine that drives enduring value creation over the long-term."

On Dec.1, 2021, ALLY announced that it had acquired Fair Square Financial, a digital-first credit card company. ALLY’s CEO Jeffrey J. Brown said, "The addition of Fair Square and its credit card offerings will enhance our suite of consumer products and align with our long-term strategy to be the leading full-service digital bank."

Recent Financial Results

COF’s total net revenue increased 6% year-over-year to $7.80 billion for its fiscal third quarter, ended Sept.30, 2021. The company’s net income grew 29% year-over-year to $2.99 billion. Also, its EPS came in at $6.78, up 34% year-over-year.

ALLY’s adjusted total net revenue increased 17% year-over-year to $2.20 billion for its fiscal fourth quarter, ended Dec.31, 2021. The company’s consumer auto originations grew 20% year-over-year to $10.90 billion. Also, its adjusted EPS came in at $2.02, up 26% year-over-year.

Past and Expected Financial Performance

COF’s revenue and EPS have grown at CAGRs of 13.1% and 53.5%, respectively, over the past three years. Analysts expect COF’s revenue to increase 11.4% for the quarter ending March 31, 2022, and 6.4% in fiscal 2022. However, its EPS is expected to decline 22.2% for the quarter ending March 31, 2022, and 25.9% in fiscal 2022. Its EPS is expected to grow at 45.9% per annum over the next five years.

In comparison, ALLY’s revenue and EPS have grown at CAGRs of 13.6% and 40.8%, respectively, over the past three years. The company’s revenue is expected to increase 7.5% for the quarter ending March 31, 2022, and 5.9% in fiscal 2022. However, its EPS is expected to decline 12.9% for the quarter ending March 31, 2022, and 14.4% in fiscal 2022. And ALLY’s EPS is expected to grow at a 38.2% rate per annum over the next five years.

Profitability

COF’s trailing-12-month revenue is 3.66 times what ALLY generates. COF is also more profitable, with a 39.51% net income margin, versus  ALLY’s 35.29%.

Furthermore, COF’s ROE and ROA of 20.56% and 2.96%, respectively, are higher than ALLY’s 19.31% and 1.68%.

Valuation

In terms of forward non-GAAP P/E, ALLY is currently trading at 6.27x, which is 15% higher than COF’s 5.45x. Furthermore, ALLY’s 0.16x forward non-GAAP PEG ratio is 60% higher than COF’s 0.10x.

So, COF is relatively affordable here.

POWR Ratings

COF has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, ALLY has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

COF has a B grade for Sentiment, while ALLY has a C grade for Sentiment.

Among 53 stocks in the Consumer Financial Services industry, COF is ranked #9. In comparison, ALLY is ranked #11.

Beyond what I have stated above, we have also rated the stocks for Value, Momentum, Growth, Stability, and Quality. Click here to view all the COF ratings. Also, get all the ALLY ratings here.

The Winner

The continuing economic recovery is driving the growth of the credit services industry. Also, the industry is well-positioned to benefit from forthcoming interest rate hikes. So, COF and ALLY should benefit. However, we think it is better to bet on COF now because of its higher profitability and lower valuation.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Consumer Financial Services industry here.

COF shares were trading at $153.25 per share on Tuesday afternoon, up $4.95 (+3.34%). Year-to-date, COF has gained 5.62%, versus a -8.20% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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