Credit Card Pilot And Loan Shift Will Forge Success

Key Takeaways

• Strategy shifting towards smaller, high-yield loans and new customer acquisitions is expected to boost revenue and improve credit quality.
  
• Initiatives like credit card piloting and share repurchases aim to expand market reach and enhance earnings via improved margins and EPS growth.
  
• High delinquency rates and reliance on non-recurring income sources could threaten sustainable growth and affect investor confidence.

Catalysts

Engages in consumer finance business in the United States.

• World Acceptance's strategy to grow its customer base by increasing the approval rates and focusing on new customer acquisitions is expected to boost revenue, as it indicates a shift towards smaller loans with higher gross yields and stable credit quality.
  
• The piloting of their first credit card showcases a new revenue stream intended to better align yield with risk and expand their market, potentially leading to increased earnings and improved net margins by lowering acquisition and servicing costs.
  
• The company has been actively restructuring its loan portfolio to focus more on small loans rather than large ones, which is anticipated to enhance net margins by reducing risk and stabilizing credit quality.
  
• World Acceptance's significant improvement in gross yields by 800 basis points in recent non-refinance loan originations suggests a focus on higher-margin products, likely resulting in increased profitability and better net margins over time.
  
• The ongoing share repurchase initiative has the potential to drive EPS growth, as reducing outstanding shares tends to increase the earnings attributable to each share, indicating strong shareholder return strategies.

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 15.9% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $81.2 million (and earnings per share of $17.08) by about May 2028, down from $89.7 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 10.6x on those 2028 earnings, up from 8.5x today. This future PE is greater than the current PE for the US Consumer Finance industry at 10.0x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

World Acceptance Future Earnings Per Share Growth

Risks

• The company's outstanding ledger decreased by 4% year-over-year, which could negatively impact future revenue growth if not addressed.
  
• There are persistent issues with high delinquency and charge-off rates, largely driven by the increase in new, riskier customers, which could negatively impact net margins and earnings.
  
• The shift towards smaller loans results in lower average balances; while it improves gross yields, it may also reduce overall interest income, impacting revenue.
  
• The reported Q4 EPS benefited from a one-time accrual release, suggesting that underlying EPS might be weaker than it appears, which could affect investor perceptions of earnings.
  
• The improvement in insurance and other income is primarily driven by tax preparation services, which may be seasonal or non-recurring, raising concerns about the sustainability of this revenue stream.

Valuation

• The analysts have a consensus price target of $136.0 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 $573.1 million, earnings will come to $81.2 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $141.97, the analyst price target of $136.0 is 4.4% 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.