Expanding Customer Base And High-Credit Quality Focus Will Strengthen Future Stability

Key Takeaways

• Expansion in customer base and improved loan portfolio quality are expected to drive higher revenue and enhance net margins.
  
• Increased yield and loan originations, coupled with efficient customer approvals, strengthen revenue growth and improve profitability.
  
• Shifting focus to smaller loans and reliance on acquisitions may challenge revenue growth and financial stability amid potential credit quality and interest rate risks.

Catalysts

Engages in consumer finance business in the United States.

• World Acceptance has experienced significant growth in its customer base, reporting a 350 basis points increase in the second quarter of 2025. This expansion is likely to drive increased revenue, as more customers can lead to more loan originations and associated interest income.
  
• The company has improved its loan portfolio quality by focusing on high-credit-quality customers and reducing average balances, which is expected to enhance net margins through lower default rates and improved yields.
  
• An increase in the approval rates for new customers to over 50% while maintaining low first payment default rates could result in higher revenue growth and stronger earnings, as these customers contribute more sustainably to the bottom line.
  
• The recent acquisition of $20 million in performing loans and continued loan origination growth is expected to contribute positively to revenue, further bolstering top-line growth and enhancing overall earnings potential.
  
• Improvements in gross yield by 113 basis points year-over-year and the expectation of continued net yield increases are likely to positively impact net margins and overall profitability, contributing to a more robust earnings outlook.

World Acceptance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming World Acceptance's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.0% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $75.4 million (and earnings per share of $16.55) by about December 2027, down from $83.8 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 7.9x on those 2027 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 5.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.84%, as per the Simply Wall St company report.

World Acceptance Future Earnings Per Share Growth

Risks

• The reduction in average balance despite an increase in customer base could indicate a shift to smaller, less profitable loans, which might impact revenue growth negatively.
  
• The contraction and focus shift from large loans to small loans suggest a risk of lowered future growth opportunities or revenue potential from larger, more profitable loans.
  
• The historical high first payment defaults when approval rates were at 50% indicate potential risks in maintaining credit quality as approval rates increase, which could impact net margins due to higher default rates.
  
• The decrease in year-over-year ledger balance and the reliance on acquisitions to improve it signal potential challenges in achieving organic growth, potentially impacting future earnings.
  
• The need to refinance revolving credit facilities within two years and potential interest rate risks could affect net margins and financial stability if borrowing costs increase.

Valuation

• The analysts have a consensus price target of $116.0 for World Acceptance 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 2027, revenues will be $566.8 million, earnings will come to $75.4 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of $116.19, the analyst's price target of $116.0 is 0.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.