New Partnerships With Hard Rock, HP, And Saks Will Strengthen Future Business Prospects

Key Takeaways

• Strong partnerships and credit management strategies could provide stable revenue growth and improved net margins through diversified brands and declining delinquency rates.
  
• Balance sheet strengthening and operational efficiencies might boost earnings by improving financial flexibility and reducing expenses relative to revenues.
  
• Uncertain regulations, changing account focus, and macroeconomic factors pressure revenue, earnings, and net margins, with elevated credit losses and rate changes posing additional risks.

Catalysts

Provides tech-forward payment and lending solutions to customers and consumer-based industries in North America.

• Bread Financial has expanded its partnerships by securing iconic brands like Hard Rock International, HP, and Saks Fifth Avenue, along with renewing significant agreements. This expansion and strong renewal rates suggest potential for stable and potentially increased revenue streams through diversified brand relationships.
  
• The strategic credit tightening and proactive risk management, alongside a focus on credit quality, imply a better risk-adjusted return in the future. This approach could lead to improved net margins due to declining delinquency rates and lower expected net loss rates.
  
• Strengthening the balance sheet by reducing debt and achieving the double leverage ratio target increases financial flexibility. This could positively impact earnings over time as interest expenses decrease and capital is potentially reallocated to more productive uses or shareholder returns.
  
• The adoption and optimization of technology and operational efficiencies are expected to contribute to positive operating leverage. This focus on operational excellence can result in lower expenses relative to revenues, thereby improving profitability and net margins.
  
• The anticipated growth in direct-to-consumer deposits helps optimize funding costs and diversify the funding mix. Over time, this strategy could improve net interest margins as the company benefits from lower funding expenses than relying solely on wholesale deposits.

Bread Financial Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bread Financial Holdings's revenue will grow by 21.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.4% today to 10.8% in 3 years time.
• Analysts expect earnings to reach $470.5 million (and earnings per share of $9.5) by about March 2028, up from $279.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $619 million in earnings, and the most bearish expecting $322 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from 8.4x 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 0.99% 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.

Bread Financial Holdings Future Earnings Per Share Growth

Risks

• The uncertainty surrounding the CFPB late fee rule and ongoing litigation could create challenges in mitigating financial impacts, potentially affecting revenue from late fees and overall net interest income.
  
• A gradual reduction in private-label accounts and a shift towards co-brand and proprietary products may lead to lower finance charges and late fees, impacting revenue growth.
  
• Persistently elevated gross credit losses and moderated consumer spending have resulted in decreased credit sales and loan balances, which might continue to pressure revenue and net margins.
  
• The expectation of Federal Reserve interest rate cuts could pressure net interest margin, impacting earnings as variable rate assets reprice faster than liabilities.
  
• Macroeconomic uncertainties, such as inflation and consumer behavior changes related to tax refund usage, pose risks to loan growth and credit performance, which could impact revenue and earnings.

Valuation

• The analysts have a consensus price target of $69.071 for Bread Financial Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $88.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.4 billion, earnings will come to $470.5 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 11.4%.
• Given the current share price of $47.87, the analyst price target of $69.07 is 30.7% 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.