Repurchasing Shares And Increasing Dividends Will Strengthen Shareholder Value

Key Takeaways

• Strategic partnership growth and high credit quality are expected to enhance revenue through increased loan originations and customer partnerships.
  
• Share buybacks and dividend increases demonstrate confidence in future growth, positively influencing earnings per share and shareholder returns.
  
• Increased funding costs, elevated credit risk, regulatory issues, and loan portfolio volatility may pressure margins and net earnings, affecting revenue growth.

Catalysts

Operates as a specialty finance company in the United States.

• Medallion Financial achieved over $1 billion in loan originations for the first time, targeting super-prime, prime, and near-prime borrowers, which is expected to enhance revenue through continued high credit quality and credit growth.
  
• The strategic partnership program saw significant growth in loan volumes, indicating potential future revenue growth from increased loan originations and enhanced customer partnerships.
  
• Increasing loan interest rates, with recreation loans at 16.02% and home improvement loans at 10.94%, will likely boost net interest income and enhance net margins.
  
• The company repurchased over 570,000 shares, with future buybacks anticipated, which could drive earnings per share (EPS) improvements.
  
• The dividend increase by 10% reflects confidence in sustaining future earnings growth and returning value to shareholders, potentially impacting shareholder return metrics positively.

Medallion Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Medallion Financial's revenue will decrease by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 25.0% in 3 years time.
• Analysts expect earnings to reach $48.7 million (and earnings per share of $1.9) by about March 2028, up from $35.9 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 6.6x on those 2028 earnings, up from 5.4x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 0.6% 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.

Medallion Financial Future Earnings Per Share Growth

Risks

• The cost of funds has increased, and margins have been pressured by nonaccrual loans, which could negatively impact net interest margins and net earnings.
  
• The possibility of delinquency levels peaking due to economic uncertainties involving broader financial instability could elevate credit risk and hinder revenue growth.
  
• Selling $121 million of recreation loans reflects reliance on external funding options to sustain growth, potentially impacting net interest income.
  
• Regulatory risks, such as the unresolved SEC matter, could lead to further legal and compliance costs, thus impacting net earnings.
  
• The seasonal high of delinquencies and charge-offs in Q4 highlights volatility in the loan portfolio, possibly affecting net margins and profitability.

Valuation

• The analysts have a consensus price target of $11.0 for Medallion Financial 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 $194.8 million, earnings will come to $48.7 million, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 11.4%.
• Given the current share price of $8.71, the analyst price target of $11.0 is 20.8% 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.