2 consumer loan stocks to buy despite industry headwinds – October 17, 2022

Zacks’ consumer lending business continues to bear the brunt of weak consumer sentiment, primarily driven by inflation, geopolitical issues and recession fears. This will therefore gradually dampen demand for consumer loans and hurt revenue growth. Weakening asset quality as economic growth continues to slow remains a major headwind.

Nevertheless, the easing of credit conditions, which has increased the number of customers eligible for consumer credit and the digitalization of operations, will continue to benefit players in the sector. So companies like Enova International, Inc. (ENV free report) and Regional management company (RM Free Report) are worth considering despite the challenges in the industry.

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 forms the largest part 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.

3 Themes Shaping the Consumer Lending Industry Outlook

Moderate Consumer Sentiments: The ongoing conflict between Russia and Ukraine, supply chain disruptions and runaway inflation (persistently hovering above 8%) continue to weigh heavily on consumer sentiment. Despite this, the Conference Board’s Consumer Confidence Index and the Expectations Index (which presents a six-month outlook) rose in September. But that appears to be largely supported by “jobs, wages and lower gas prices.”

Lynn Franco, senior director of economic indicators at the Conference Board, said: “The current situation index has risen again, after falling from April to July. The expectations index has also improved from summer lows, but recession risks nonetheless persist. Concerns about inflation eased further in September – largely due to lower prices at the gas pump – and are now at their lowest level since the start of the year.

Consumer spending is expected to face headwinds from inflation and rising interest rates over the coming months. This will therefore result in a drop in demand for consumer credit. Thus, the growth of the net interest margin (NIM) and the NII for consumer finance companies is likely to be hampered.

Credit quality may deteriorate: Since March 2020, the US administration has provided substantial financial assistance to individuals through various packages to overcome challenges related to the pandemic. However, with the phasing out of stimulus packages and the Federal Reserve signaling continued monetary policy tightening to control inflation, there is a strong likelihood that the US economy will slide into a recession over the next six to nine month.

Additionally, according to the central bank’s latest summary of economic projections, the U.S. economy will grow 0.2% in 2022 and 1.2% in 2023, which is lower than the previous projection of 1.7% in increase for 2022 and 2023. ‘ ability to repay loans. Thus, consumer loan providers will need to build up additional reserves to deal with unexpected defaults and late payments due to the economic downturn. This will thus lead to a deterioration in the quality of the assets of the players in the sector.

Relaxation of lending standards: With the nation’s major credit reporting agencies removing all tax privileges from consumer credit reports since 2018, many consumers’ credit scores have improved. This has increased the number of consumers for industry participants. In addition, the easing of credit standards is helping consumer loan providers meet the demand for loans.

Zacks’ industry ranking reflects bleak outlook

The Zacks Consumer Lending Industry is a group of 17 stocks within the broader Zacks Finance sector. The industry currently carries a Zacks industry ranking of #149, which puts it in the bottom 41% 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.

The industry’s positioning in the bottom 50% of Zacks-ranked industries is the result of a disappointing earnings outlook for constituent companies overall. Looking at revisions to aggregate earnings estimates, it appears analysts are gradually losing confidence in the earnings growth potential of this group. Since the end of May 2022, industry earnings estimates for the current year are down 4.4%.

Before we outline a few stocks you might want to add to your portfolio despite industry headwinds, let’s take a look at recent stock market performance and the valuation picture.

Industry vs wider market

Zacks’ consumer lending sector has underperformed both the Zacks S&P 500 composite and its own sector over the past year.

Shares in this industry have collectively lost 39.2% during this period, while the Zacks S&P 500 composite sector and Zacks Finance have fallen 21.2% and 21%, 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 0.96X. The highest level of 1.54X and a median of 1.20X are recorded over the past five years.

This compares to the S&P 500 12-month P/TBV of 9.14X, 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’s 12-month P/TBV of 4.08X for the same period is well above the Zacks Consumer Lending sector’s ratio, as shown in the chart below.

Tangible Price-to-Pounds Ratio (TTM)

2 Consumer Loan Stocks Overcoming Industry Challenges

Enova International: Based in Chicago, IL, Enova is a leading fintech company 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 56 million customer transactions and collected nearly 61 terabytes of consumer behavior data since its launch in 2004. This has enabled Enova to better analyze its specific clientele.

In addition, the company has diversified its activities. Some of ENVA’s financing products and services are installment loans, lines of credit and receivables purchase agreements. In addition, the company has undertaken acquisitions to further improve its market share.

This Zacks Rank #1 (Strong Buy) company’s proprietary 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.

You can see the full list of today’s Zacks #1 Rank stocks here.

Enova International believes in returning capital to shareholders through share buybacks instead of paying dividends. In February 2022, he authorized a redemption authorization worth $100, which is due to expire on June 30, 2023.

ENVA shares are down 23.5% so far this year. While the company’s earnings are expected to fall 12.3% this year, the trend will likely reverse thereafter. For 2023, earnings are expected to increase by 11.3%.

Pricing and Consensus: ENVA

Regional Directorate : Based in Greer, SC, RM offers small loans, large loans, retail loans, and related payment insurance and collateral protection products to customers with “less than perfect credit profiles.” The company operates through more than 330 branches under the name “Regional Finance” in 17 states.

RM’s total financial receivables recorded a five-year CAGR of 14.4% (ending 2021). This led to a sharp increase in total revenue, which recorded a CAGR of 12.2% over the same period. The company quickly expanded its business by opening branches in new and existing states. It intends to expand operations to “at least five additional states” this year-end from the 2021 level.

Regional management is also expanding/enhancing digital capabilities that will enable them to improve efficiency, improve customer experience, and test new lead generation mechanisms, which will help diversify and strengthen new business opportunities. business acquisition.

Unlike Enova International, RM believes in returning capital to shareholders through regular dividend payments. The company started paying dividends in October 2020 and since then it has increased the same amount twice. Currently, the company pays 30 cents per share as a quarterly dividend.

This Zacks Rank #2 (Buy) stock has plunged 50.2% since the start of the year. While the company’s earnings are expected to fall 21.7% for 2022, they are expected to rise 11.2% next year.

Pricing and Consensus: RM

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