The Zacks Analyst Blog Highlights: Cisco Systems, Capital One Financial Corporation, HSBC Holdings Plc, ING Groep NV and and Wells Fargo & Company

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Aug 11, 2011, 09:30 ET

CHICAGO, Aug. 11, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Cisco Systems (Nasdaq: CSCO), Capital One Financial Corporation (NYSE: COF) HSBC Holdings Plc (NYSE: HBC) ING Groep NV (NYSE: ING) and Wells Fargo & Company (NYSE: WFC).

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Here are highlights from Wednesday's Analyst Blog:

Cisco Surprises in Tough Quarter

Cisco Systems (Nasdaq: CSCO) has reported its fiscal 4th quarter 2011 earnings results after the bell Wednesday, and issued a positive surprise on both the top and bottom lines. Revenues for the quarter reached $11.2 billion, above the Zacks Consensus Estimate of $10.99 billion.

At Zacks, we use the adjusted earnings figures and subtract stock-based compensation. Cisco reported 35 cents per share in the quarter, beating the Zacks Consensus of 32 cents.

Guidance is not available at this hour, but Cisco's conference call should be very informative. In a 4th quarter where the company announced last month it would be cutting 6500 jobs and cited market weakness as the main reason for the restructuring, Cisco's shares had fallen 8% just since Monday, almost 23% over the past 3 months and were down more than 42% from its 52-week high.

Seemingly routine modest earnings beats followed by lowered guidance have helped feed this underperformance. Cisco cited an increased tax rate during its 3rd quarter lowering of guidance. Gross margin has reportedly slipped for the 4th quarter from 63.3% to 61.28%, but this comes as a shock to no one -- we were all expecting Cisco to report on a difficult quarter.

Also, analysts covering the routing and services tech giant had remained dormant regarding estimate revisions throughout the quarter, with the only estimate revisions coming in over the last 90 days on the full-year side. Nevertheless, Cisco has now posted a positive earnings surprise -- albeit another modest one (9.4%) -- in each of the last 5 quarters.

Shares in after-market trading are up close to 7% at this hour, but take this with a grain of salt -- with the extraordinary turbulence we've seen in the market over the past week, it's anybody's guess how CSCO shares will hold up in the coming trading sessions.

Capital One to Buy HSBC Card Unit

Capital One Financial Corporation (NYSE: COF) has finally decided to acquire HSBC Holdings Plc's (NYSE: HBC) U.S. credit card business. HSBC was trying to sell the unit since the middle of this year as part of its long-term strategy to reduce costs up to $3.5 billion by 2013and cut back retail banking.

Capital One announced a definitive agreement early Wednesday to buy the business for $32.7 billion, which is at a premium of 8.75% to par value of all receivables or about $2.6 billion (value as of June 30, 2011). The purchase will give Capital One more than $30 billion in its credit card portfolio.

The deal is expected to be completed in the second quarter of 2012 and is likely to bring high teens GAAP as well as operating earnings per share for Capital One in 2013. Also, an IRR of greater than 20%, return on invested capital of more than 25% and a 400 basis point improvement in return on tangible equity could be the outcome of the transaction in 2013.

Capital One anticipates realizing cost savings of about $350 million and incur restructuring costs of about $420 million due to this transaction.

HSBC's U.S. credit card business is a strategic fit for Capital One as it has a proven track record and generates more than half its revenue from credit cards. The deal will definitely improve the credit card franchise of the company. Consequently, Capital One is expected to significantly gain from this transaction with low business execution risk.

Capital One expects its Tier 1 common ratio to be in the mid-9% range following the closure of the deal. The company expects to achieve this capital position through a combination of strong internal capital generation, balance sheet repositioning and a capital raise. Currently the company anticipates to raise about $1.25 billion capital prior before the deal is closed.

The deal will help HSBC earn an estimated post-tax gain of $2.4 billion.

For Capital One, it would be the second significant acquisition this year. In June, the company had announced a deal to acquire ING Direct USA, the online banking unit of Amsterdam-based ING Groep NV (NYSE: ING), in a $9.0 billion stock-cum-cash deal.

From HSBC's perspective, although profitable, the U.S. credit card unit is loaded with several riskier assets that the company had taken over while expanding its consumer lending business. These, in addition to the massive size of the credit card portfolio, were hindering HSBC's divestiture plan.

HSBC acquired the credit card unit in 2003 as part of its $15.5 billion purchase of U.S. subprime mortgage lender Household International (HSBC Finance). Despite being profitable, the card business did not suit HSBC's business structure. As a result, HSBC was looking for a suitable buyer to get a feasible price for the unit.

After many talks on the possible sale of its credit card business, in June, HSBC's CEO Mr. Stuart Gulliver had announced that the company would shut down its U.S. credit card unit had it not been able to find a suitable buyer.

Wells Fargo & Company (NYSE: WFC) was also among the few companies interested in buying the unit. However, Capital One finally became the front runner.

The acquisition should bring long-term benefits for both companies. While after selling the unit HSBC will be able to better concentrate on its the emerging market strategy, Capital One is expected be able to drive shareholder value after buyingit.

Capital One currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, HSBC retains a Zacks #4 Rank, which implies a short-term Sell rating.

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