Morgan Stanley resumes coverage of Capital One Financial with Buy equivalent

Morgan Stanley has reinstated an Overweight rating on Capital One Financial, highlighting the strategic benefits from its recent acquisition of Discover Financial, and believes the stock remains undervalued.

The acquisition is expected to enhance Capital One's fee income by eliminating debit interchange restrictions and potentially increase revenues to $1.03 billion by 2027, surpassing its previous guidance.

Capital One is projected to achieve annual cost savings of around $1.5 billion within two years, alongside a solid capital position that allows for greater flexibility in its financial strategy.

The stock has risen 22% year-to-date, and Morgan Stanley sets a price target of $261, anticipating further growth driven by synergies from the acquisition and a strong earnings outlook.

Recommendation Rating: Overweight on Capital One Financial

Morgan Stanley has reinstated its coverage of Capital One Financial (NYSE: COF) with an Overweight rating, citing the strategic advantages gained from the acquisition of Discover Financial and noting that the stock remains underpriced.

Pre-market trading saw the shares rise by 0.83%, reaching $219.30.

The financial services firm completed its acquisition of Discover Financial on May 18. Analyst Jeffrey Adelson remarked, "By integrating Discover's network, Capital One can eliminate the debit interchange restrictions that most banks encounter, leading to an immediate increase in fee income. We project a modest improvement in debit growth and network economics, estimating revenues of $1.03 billion by 2027, compared to Capital One's own guidance of $1 billion about two years post-acquisition."

Adelson further highlighted Capital One's robust capital position, commenting, "We believe Capital One maintains one of the highest excess capital levels relative to regulatory minimums across the banking sector, particularly within Consumer Finance, at nearly 20% of its market capitalization. We anticipate that the company will provide updated insights regarding capital targets and returns in the upcoming second-quarter earnings report."

He added, "While we expect some impacts on consumer credit metrics to manifest later this year and into 2026—primarily due to tariffs and the resumption of student loan payments—recent data has consistently exceeded expectations."

Capital One has projected annual cost savings of approximately $1.5 billion within two years, which constitutes around 23% of Discover's operating expenses. "This target seems attainable compared to historical bank mergers and acquisitions, where the norm has been a 30-35% reduction in the acquired bank's expenses," the research note explained.

The stock has demonstrated strong performance, recording a 22% increase year-to-date. However, the analysis suggests further growth potential, asserting that the stock is not yet fully reflective of expected synergies and increases in capital return. It warrants a higher valuation multiple due to the opportunities presented by the payments and network sectors. Consequently, Morgan Stanley has set a price target of $261 for Capital One.

In terms of earnings projections, Morgan Stanley estimates that Capital One's EPS will reach $18.13 in 2026 (compared to the consensus of $19.44) and $23.93 in 2027 (versus the consensus of $24.33).

Morgan Stanley's recommendation aligns with the broader sentiment among sell-side analysts, who generally rate the stock as a Buy. Additionally, quantitative analysis categorizes Capital One as a Strong Buy.