Shares of Capital One Financial (NYSE: COF) have delivered impressive returns of 60% to investors over the past year. This banking leader, widely recognized for its large credit card operations, has thrived thanks to strong economic conditions, which include robust consumer spending and borrowing.

These economic indicators will be central when the company shares its third-quarter results on October 24. As the stock reaches a 52-week high, the question remains: can this upward trend continue, and should you invest in Capital One before the significant updates? Here’s what you need to consider.

Positive Prospects for 2025

Capital One distinguishes itself with its unique operational model. Unlike larger banks that merely include credit cards among their services, Capital One’s primary business revolves around issuing credit cards, complemented by its consumer and commercial banking sectors.

This strategy allows Capital One to benefit from its lucrative credit card segment while offering additional banking products and building a growing deposit base for low-cost funding. However, consumer lending often carries risks and can be susceptible to changing economic conditions.

Interestingly, the U.S. economy has performed better than anticipated in recent years, despite high inflation and rising interest rates. While fears of an impending recession have loomed, Capital One has continued to grow, maintaining relatively solid credit quality metrics.

In the second quarter, Capital One saw about a 1% increase in loans held for investment and total deposits, which management labeled as “strong” outcomes. Importantly, the net interest margin increased to 6.7%, up from 6.48% in the same quarter last year.

Even though Capital One raised its allowance for credit losses and experienced a slight uptick in its net charge-off rate to 3.36% from 3.33% in Q1, the overall situation appears to be stabilizing. This sentiment was echoed by Chief Executive Officer Richard D. Fairbank during the Q2 conference call:

Year-over-year increases in both the charge-off and delinquency rates have been slowly declining over the past several quarters, continuing to decrease in the second quarter. What we observe is a stable situation. The U.S. consumer still contributes to the economy’s strength.

These favorable trends are expected to persist. The Federal Reserve’s September interest rate cut of 50 basis points (0.5%) should help improve credit demand, potentially sparking a robust growth cycle into 2025.

Anticipated Outcomes for Capital One’s Q3 Earnings

Analysts predict that Capital One will report third-quarter net revenue of $9.86 billion, marking a 5% increase from last year. Expected earnings per share (EPS) are projected at $3.75, which may vary based on the bank’s adjustments to its allowance for credit losses, essentially its reserve for anticipated bad debts.

A significantly higher figure this quarter could raise concerns regarding underlying credit conditions and borrower health. Conversely, if Capital One decides to reduce some of its reserves with a lower provision for credit losses, it may suggest confidence in improving circumstances.

Investors will also be eager for updates regarding Capital One’s acquisition of Discover Financial Services, announced earlier this year. Integrating Discover’s payment network is viewed as a way to diversify and enhance Capital One’s global reach, reinforcing a favorable long-term growth outlook. Any indication that the acquisition is facing regulatory challenges or delays could create short-term volatility in the stock, which is a risk to monitor.

Ultimately, the management’s message during the earnings conference call will determine the stock’s performance following the report.

Is Capital One Stock Worth Buying?

I express a positive outlook on Capital One as a leading player well-positioned to expand its market dominance. I believe the stock merits a buy rating considering the promising landscape for consumer credit as we head into 2025. Indications that earnings are on the rise could trigger further stock price growth. Investors with a long-term approach may want to consider adding Capital One to a diversified investment portfolio.

Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Dan Victor holds no positions in any of the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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