Revenue May Decline Amid Shift To Smaller Loans But Credit Quality Will Improve

Key Takeaways

• Shift towards small loans and higher credit quality customers may improve net margins but limit short-term revenue growth with lower yields.
  
• Recent growth from new customers poses risks if economic conditions challenge repayments, potentially affecting future earnings.
  
• Improved portfolio yields and customer growth, enhanced approval rates, and strategic focus on smaller loans boost profitability, reduce risk, and improve margins.

Catalysts

Engages in consumer finance business in the United States.

• World Acceptance has seen a significant shift in their loan portfolio composition, moving away from large loans to small loans, which can impact revenue due to the different yield profiles and potential changes in demand for loan products.
  
• As the company focuses on attracting higher credit quality customers and reducing average balances, this could lead to better net margins but may limit short-term revenue growth as the smaller loans typically have lower yields.
  
• A large portion of World Acceptance's recent growth has been driven by new customers, which presents a risk if macroeconomic conditions shift and these customers face repayment challenges, potentially impacting future earnings.
  
• Operational changes made to address tax refund timing and processing may impact revenue and earnings if these changes do not align with customer behavior or economic conditions.
  
• With a move towards longer-term small loans and reduced refinance activity, World Acceptance could face a slower revenue cycle, impacting revenue growth and requiring careful management of the yield and delinquency trends for sustained profitability.

World Acceptance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming World Acceptance's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.4% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $79.2 million (and earnings per share of $16.65) by about January 2028, down from $80.5 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 7.6x on those 2028 earnings, down from 10.1x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 4.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.94%, as per the Simply Wall St company report.

World Acceptance Future Earnings Per Share Growth

Risks

• World Acceptance has reported an improvement in portfolio yields by over 200 basis points year-over-year, which could positively impact revenue and earnings by increasing the profitability of their loan products.
  
• The company has experienced a 7% growth in its customer base during the third quarter, compared to 3% in the previous year, indicating potential for increased revenue from a larger customer population.
  
• There is a marked improvement in approval and booking rates for new customers, with approval rates increasing by 47% compared to the same period in the prior year, enhancing the potential for revenue growth through new customer acquisitions.
  
• World Acceptance's strategy of focusing on smaller loans with improved credit quality provides a more stable risk/reward profile, potentially maintaining or improving net margins by minimizing risk exposure and improving credit quality.
  
• The company's customer delinquency and charge-off rates have the potential for ongoing improvement, especially as the portfolio mix shifts away from large loans, which could positively influence net margins and earnings by reducing losses.

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 2028, revenues will be $568.0 million, earnings will come to $79.2 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $150.39, the analyst's price target of $116.0 is 29.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.