Innovative Underwriting And Decisive Partnerships Fuel Optimistic Revenue And Profit Growth

Key Takeaways

• Enhanced underwriting and a new scorecard are poised to improve loan performance, reducing delinquencies and defaults, enhancing future revenue and margins.
  
• Strategic partnerships with credit unions, a bank, and Securian Financial Group, alongside optimistic automotive industry projections, are set to drive loan growth and increase demand for services.
  
• Open Lending faces profitability volatility and growth challenges due to high delinquencies, macroeconomic pressures, and reliance on struggling credit union customers.

Catalysts

Provides lending enablement and risk analytics solutions to credit unions, regional banks, finance companies, and captive finance companies of automakers in the United States.

• Open Lending's improved underwriting standards and the successful implementation of an enhanced lenders protection proprietary scorecard are expected to lead to reduced delinquency rates and lowered risk of default, positively influencing future revenue and net margins by ensuring better loan performance.
  
• The strategic signing of new credit union customers and a bank, increasing new customer acquisitions, is likely to drive certified loan growth, thereby significantly increasing future revenues.
  
• The optimistic outlook on the automotive industry, with improving inventory levels and affordability, points towards an anticipated increase in vehicle sales activity, which could lead to increased demand for Open Lending's services and positively impact revenue growth.
  
• Enhancements in product and technology aimed at improving lender and borrower experiences and operational efficiencies are expected to streamline operations and potentially lead to reduced operational costs and improved profit margins.
  
• The addition of Securian Financial Group as an insurance partner extends Open Lending's premium capacity, which, in anticipation of a return to growth, is forecasted to positively impact profit share revenue and contribute to overall revenue growth.

Assumptions

• Analysts are assuming Open Lending's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 35.7% in 3 years time.
• Analysts expect earnings to reach $60.7 million (and earnings per share of $0.38) by about October 2027, up from $6.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2027 earnings, down from 114.6x today. This future PE is lower than the current PE for the US Capital Markets industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 1.2% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

Risks

• The negative adjustment of $6.7 million in profit share due to elevated delinquencies and defaults may signal ongoing volatility in profitability, affecting net income and earnings per share.
  
• A macroeconomic environment characterized by high interest rates and inflation could diminish consumer purchasing power and reduce demand for loans, impacting Open Lending's revenue from certified loans and profit share.
  
• Tightening of credit by Open Lending to mitigate risks amid elevated loan delinquencies could lead to a decrease in loan origination volume, potentially affecting total revenue and growth prospects.
  
• Weakness in new auto retail sales, as highlighted by the impact of the CDK dealer management system software outage, could persist, adversely affecting certified loan volumes and program fee revenues.
  
• The reliance on credit union customers facing challenges such as high loan-to-share ratios and low share growth may limit Open Lending's ability to expand its lending activities, impacting revenue growth opportunities.

Valuation

• The analysts have a consensus price target of $7.12 for Open Lending based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $170.0 million, earnings will come to $60.7 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of $5.91, the analyst's price target of $7.12 is 17.1% 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.