US Consumer Finance Margins Will Decline Amid Regulatory Pressure

Key Takeaways

• Revenue and margin growth projections may be too optimistic due to limited loan growth ambitions, stable loan mix, and persistent branch-based operating costs.
  
• Increasing regulation, fintech competition, and higher financial literacy threaten long-term customer acquisition, retention, and the core subprime lending model.
  
• Strong loan growth, improved margins, share buybacks, conservative strategy, and new product expansion position the company for stable earnings and diversified revenue growth.

Catalysts

Engages in consumer finance business in the United States.

• Investors may be overestimating the sustainability and pace of recent customer base and loan origination growth-recent results showed the highest new originations in years, but management indicates no intention to pursue double-digit portfolio growth, suggesting near-term revenue expectations may be too high.
  
• The market could be overly optimistic about future yield expansion as gross yields recently rose over 230 basis points, but recent commentary highlights a stable, not escalating, mix of higher-yielding smaller loans, possibly capping longer-term net interest margin or earnings upside.
  
• Current enthusiasm around the addressable market from persistent underbanking and population growth may not account for growing financial literacy and fintech competition, both of which can erode future customer acquisition and retention rates, pressuring top-line revenue growth.
  
• Investors may be underestimating the long-term impact of tightening regulatory scrutiny or rate caps on the core subprime lending model, which could reduce World Acceptance's ability to sustain high loan growth and margins, making projected earnings at risk.
  
• Expectations for margin expansion from digitalization and risk-based pricing may not materialize as rapidly as assumed because heavy reliance on physical branches persists, maintaining higher operating expenses and constraining net margin improvement.

World Acceptance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming World Acceptance's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.3% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $48.1 million (and earnings per share of $13.05) by about July 2028, down from $81.1 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 16.8x on those 2028 earnings, up from 10.4x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 5.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.68%, as per the Simply Wall St company report.

World Acceptance Future Earnings Per Share Growth

Risks

• Strong loan origination growth and the highest new originations since fiscal 2020, alongside a 4% increase in the customer base and improved loan approval rates while maintaining credit quality, suggest ongoing topline revenue growth potential.
  
• Increased gross yields by over 230 basis points year-over-year, along with stable to improving late-stage delinquency and stable first pay default rates, support an improved net margin outlook and earnings resilience.
  
• Substantial capacity for stock repurchases (up to 23–25% of outstanding shares over 12 months) due to a new credit agreement and bond redemptions, could generate strong earnings per share (EPS) growth through declining share count, supporting shareholder returns.
  
• Early indications from the rollout of the New World Finance Smile credit card point toward potential expansion into new product lines that leverage data analytics to improve risk alignment and customer retention, which can diversify revenue streams and further improve margins.
  
• Prudent and conservative growth strategy, including focus on improving customer retention and not pursuing excessive risk or double-digit portfolio growth, mitigates the risk of credit losses and supports earnings stability over the long term.

Valuation

• The analysts have a consensus price target of $157.5 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 $564.6 million, earnings will come to $48.1 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $159.13, the analyst price target of $157.5 is 1.0% 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.