Recent Acquisitions May Impact Valuations for Capital One, Rocket

Stock investors eye Capital One and Rocket Companies as acquisitions prompt potential earnings improvements. Capital One's acquisition of Discover could enhance their payments network, while Rocket's pending purchase of Mr. Cooper aims to stabilize earnings in a rising-rate environment.

Date: 30-05-2025

AI Rating: 7

Valuation Insights: The report discusses how stocks can appreciate when the market rerates the valuation based on improved earnings. Capital One Financial's acquisition of Discover Financial Services is a strategic move that could potentially enhance its earnings multiple due to new revenue streams and synergies. On the other hand, Rocket Companies' pending acquisition of Mr. Cooper Group is positioned to stabilize earnings amidst a challenging interest rate environment.

Capital One Financial (COF): The acquisition of Discover allows Capital One to leverage Discover's closed-loop payments system, which is expected to lead to increased expense and network synergies. Management has projected $1.3 billion in expense synergies and $1.2 billion in network synergies by 2027. This could enhance profitability, driving up the company's earnings per share (EPS) and improving its valuation multiple over time.

Rocket Companies (RKT): The merger with Mr. Cooper Group is anticipated to enhance Rocket's revenue mix, increasing service revenue from mortgage servicing. This shift from being primarily dependent on origination revenue to a more stable service model could boost total revenue, providing a clearer path for earnings growth in the face of rising interest rates. The anticipated increase in servicing revenue from 17% to 28% of total revenue validates this strategic acquisition.

The challenges surrounding both firms include the need for Capital One to improve Discover's brand and network acceptance, and Rocket's dependency on market acceptance of higher mortgage rates. Yet, both companies stand to benefit from increased earnings visibility and stability. Investors should watch closely as these acquisitions develop and impact stock valuations in the upcoming quarters.

Stocks: COF RKT COOP