AI Adoption And Sales Expansion Expected To Reduce Costs In 2025

Key Takeaways

• Strategic growth initiatives and sales expansions are expected to significantly boost loan originations and future revenues.
  
• AI technology implementation is projected to improve cost efficiency, credit performance, and profitability, enhancing net margins in the future.
  
• Rising expenses, decreased earnings, and high charge-offs and delinquencies along with low auction recoveries could pressure profitability and future earnings.

Catalysts

Operates as a specialty finance company in the United States.

• The company improved its credit approach and performance, positioning itself for more aggressive growth in 2025. This strategic adjustment is expected to enhance revenue through increased loan originations.
  
• The addition of 42 new sales representatives and the expansion into new territories are expected to drive significant growth in loan originations. This operational shift is likely to lead to higher revenues in the future.
  
• Consumer Portfolio Services has expanded its large dealer group base, increasing originations from these groups from 20% to 28%. This shift is anticipated to boost loan originations and revenues due to the larger volume of business from these partnerships.
  
• The implementation of AI-driven fraud prevention and voice bots is expected to reduce costs, improve credit performance, and enhance profitability. These technologies are projected to save the company $6 million to $7 million in 2025, positively impacting net margins.
  
• The expected improvement in net interest margin as the weaker 2022 vintages phase out and are replaced by better-performing, lower-cost newer vintages is likely to enhance earnings and profitability, supporting long-term growth.

Consumer Portfolio Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Consumer Portfolio Services's revenue will grow by 62.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $110.5 million (and earnings per share of $4.43) by about April 2028, up from $19.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.0x on those 2028 earnings, down from 9.4x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.6x.
• Analysts expect the number of shares outstanding to grow by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Consumer Portfolio Services Future Earnings Per Share Growth

Risks

• Consumer Portfolio Services saw a significant increase in expenses, rising 26% year-over-year, primarily due to increased interest expenses driven by higher rates and portfolio growth, which could negatively impact net margins and profitability.
  
• Pretax earnings and net income for both the quarter and year were down significantly compared to 2023, with pretax earnings decreasing 24% in Q4 and 55% for the year, potentially affecting earnings and shareholder value.
  
• The net interest margin for the year slightly decreased compared to 2023, indicating that despite revenue growth, the company's profitability on lending activities is under pressure, possibly impacting future earnings.
  
• There is still a high level of net charge-offs and delinquencies, with Q4 2024 net charge-offs at 8.02%, up from the previous year, and delinquencies over 30 days at 14.85%, which could lead to increased credit losses and impact net profit.
  
• Auction recovery rates remain low at around 30%, compounded by macroeconomic factors such as high inflation and repo agent scarcity, which could continue to affect the recovery of collateral and thus negatively impact revenue recovery from defaulted loans.

Valuation

• The analysts have a consensus price target of $18.0 for Consumer Portfolio Services based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $799.9 million, earnings will come to $110.5 million, and it would be trading on a PE ratio of 5.0x, assuming you use a discount rate of 11.4%.
• Given the current share price of $8.41, the analyst price target of $18.0 is 53.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.