2 consumer loan stocks to buy despite industry challenges
The Zacks consumer loan industry continues to bear the brunt of relatively low interest rates. Although economic growth remains solid, weak consumer sentiment, primarily driven by inflationary concerns and near-term geopolitical issues, is expected to hamper demand for consumer loans.
Nonetheless, the easing of lending standards, which has increased the number of customers eligible for consumer loans, and improving asset quality should continue to provide much-needed support to these businesses. In addition, digitization of operations will increase operational efficiency. Thus, industry players like SLM Company SLM and Enova International, Inc. ENVA will benefit from these developments.
About the industry
Zacks consumer lending industry includes companies that provide mortgages, refinance, home equity lines of credit, credit card loans, auto loans, education/student loans and personal, among others. These help industry players generate net interest income (NII), which constitutes a significant portion of total revenue. The outlook for companies in this industry is highly sensitive to the country’s overall economic situation and consumer sentiment. In addition to offering the products and services mentioned above, many consumer loan providers are involved in other activities such as commercial lending, insurance, loan servicing and asset recovery. These help companies generate royalty income. In addition, it helps companies diversify their sources of income and be less dependent on the vagaries of the economy.
4 Key Consumer Lending Industry Themes to Watch
Inflation and weak consumer sentiment: Geopolitical disputes between Russia and Ukraine, supply chain challenges and searing inflation figures weighed heavily on consumer sentiment. Due to these factors, the Conference Board’s consumer confidence index fell for the second consecutive month in February. Lynn Franco, senior director of economic indicators at the Conference Board, noted: “Meanwhile, the proportion of consumers planning to buy homes, automobiles, major appliances and vacations in the next six months have all fallen. “. Thus, consumer spending is expected to be affected by rising prices and thus likely lead to a lower pace of demand for consumer loans. Thus, the growth of the net interest margin (NIM) and the NII for consumer finance companies is likely to be hampered.
Relatively low prices: The Federal Reserve had cut interest rates to near zero in March 2020 to support the US economy in the face of the coronavirus-induced slowdown. Since then, the rates have remained unchanged. Although the central bank indicated a rate hike at its FOMC meeting in March, market participants do not expect any aggressive action. Thus, relatively lower rates should continue to put pressure on the NIM and NII in the short term.
Asset quality is showing signs of improvement: Since March 2020, the US administration has been providing substantial financial assistance to individuals through various packages. Supported by these, as well as an extensive vaccination campaign, economic growth should continue at a steady pace. According to the Fed’s December 2021 Summary of Economic Projections, the U.S. economy is expected to grow 4% in 2022 and 2.3% in 2023. Thus, favorable developments have led providers of consumer loans to release reserves (which they had built up in early 2020 to deal with unexpected defaults and late payments due to the economic downturn resulting from the coronavirus chaos) in the income statement.
Relaxation of lending standards: With the nation’s major credit reporting agencies removing all tax privileges from consumer credit reports since 2018, several consumers’ credit scores have gone up. This has increased the number of consumers for industry participants. In addition, the easing of credit standards is helping consumer loan providers meet the increased demand for loans.
Zacks’ industry ranking reflects bleak outlook
The Zacks Consumer Lending Industry is a group of 18 stocks within the broader Zacks Finance sector. The industry currently carries a Zacks industry ranking of #187, which places it in the bottom 26% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates short-term underperformance. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before outlining a few stocks you might want to add to your portfolio despite industry concerns, let’s take a look at recent stock market performance and the valuation picture.
Industry vs wider market
Zacks’ consumer lending sector has outperformed both the Zacks S&P 500 composite and its own sector over the past year.
Shares in this industry collectively gained 18.1% during this period, while the Zacks S&P 500 composite sector and Zacks Finance rose 10.8% and 10.7%, respectively.
Year-over-year price performance
Current industry assessment
Based on the price to tangible book (P/TBV), which is commonly used to value providers of consumer loans due to large variations in their results from quarter to quarter, the sector is currently trading at 1.25X. The highest level of 1.54X and a median of 1.23X are recorded over the past five years.
This compares to the S&P 500’s 12-month P/TBV of 19.26X, as seen in the chart below.
Tangible Price-to-Pounds Ratio (TTM)
As financial stocks generally have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense for many investors. But a comparison of the group’s P/TBV ratio with that of its wider sector ensures that the group is trading at a decent discount. The Zacks Finance sector 12-month P/TBV of 4.39X for the same period is well above the Zacks Consumer Lending sector ratio, as shown in the chart below.
Tangible Price-to-Pounds Ratio (TTM)
2 consumer loan providers to watch right now
SLM Company: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. This Newark, DE-based company focuses on providing private education loans and provides higher education savings and insurance products to students and families.
The anticipation of modest enrollment growth will lead to increased demand for student loans. This, combined with the increase in tuition fees, is likely to improve the company’s prospects. SLM expects to sell loans worth $3 billion this year, $1 billion in the first quarter and $2 billion in the third quarter of 2022.
The increase in private education loans bodes well for Sallie Mae. Management expects an 8-10% increase in private education lending for 2022. In addition, the company is focused on expanding its operations through investments in diverse product offerings and inorganic businesses. In January, Sallie Mae signed an agreement with Epic Research LLC to acquire a digital marketing and education solutions company, Nitro College. The deal will strengthen its digital marketing skills, reduce the cost of acquiring customer accounts and help it become a provider of holistic educational solutions for students.
Shares of this company Zacks Rank #1 (Strong Buy) are up 21.1% over the past year. While its earnings are expected to decline 19.9% for 2022, the trend will likely reverse thereafter. In 2023, profits are expected to increase by 7.3%.
You can see the full list of today’s Zacks #1 Rank stocks here.
Pricing and Consensus: SLM
Enova International: Based in Chicago, IL, Enova is a leading fintech company specializing in providing online financial services. The company currently provides its services in the United States, United Kingdom, Canada, Australia, and Brazil. ENVA targets small businesses and capitalizes on its proprietary technology, analytics and customer service capabilities to underwrite and fund loans.
As an early entrant into the online lending space, the company has completed more than 55 million customer transactions and collected nearly 49 terabytes of consumer behavior data since its launch in 2004. This has enabled Enova to better analyze its specific clientele.
In addition, the company is diversifying its activities. Some of ENVA’s financing products and services are installment loans, line of credit accounts and receivables purchase agreements. In addition, the company has undertaken acquisitions to further improve its market share.
This company’s proprietary Zacks Rank #2 (Buy) underwriting systems leverage advanced risk analytics, including machine learning and artificial intelligence. ENVA has provided over 7 million customers with over $40 billion in loans to improve their financial health.
Shares of ENVA have jumped 31.1% over the past 12 months. While the company’s earnings are expected to fall 23.3% for this year, the trend will likely reverse thereafter. In 2023, profits are expected to increase by 14.3%.
Pricing and Consensus: ENVA
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