Prudent Underwriting And Capital Moves Will Secure Future Stability

Key Takeaways

• Strategic credit-tightening and prudent underwriting are expected to enhance credit performance and improve net margins for Bread Financial.
  
• Expansion of partner programs and product offerings indicates diversification and potential for revenue growth.
  
• Economic pressures and credit risk could impact Bread Financial's profitability due to tariffs, inflation, interest rates, and potential unemployment rises affecting consumer demand.

Catalysts

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

• Bread Financial has implemented strategic credit-tightening actions and prudent underwriting, which are expected to improve credit performance trends, thus enhancing net margins.
  
• The company's execution of a $400 million subordinated note offering and a $150 million share repurchase program improves capital flexibility, potentially leading to future earnings growth and higher earnings per share (EPS).
  
• The continued growth in direct-to-consumer deposits, up 13% year-over-year, enhances the company's funding mix and may contribute positively to net interest margins.
  
• New partner signings, such as the program with Crypto.com, testifies to Bread Financial’s ability to diversify and expand its reach, likely resulting in future revenue growth.
  
• Expansion of product offerings to AAA members and successful renewals with existing partners like Academy Sports indicate strong partnerships and potential for increased revenues.

Bread Financial Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bread Financial Holdings's revenue will grow by 20.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.7% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $401.5 million (and earnings per share of $8.32) by about April 2028, up from $286.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $527 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 8.3x on those 2028 earnings, up from 8.2x today. This future PE is lower than the current PE for the US Consumer Finance industry at 10.0x.
• Analysts expect the number of shares outstanding to decline by 4.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.38%, as per the Simply Wall St company report.

Bread Financial Holdings Future Earnings Per Share Growth

Risks

• The potential impact of tariffs and trade policy uncertainties could lead to slower consumer spending and lower retail sales growth, affecting Bread Financial's revenue and net margins.
  
• Inflationary pressures, if they continue to rise, could weaken consumer purchasing power and demand, potentially reducing revenue and impacting earnings.
  
• The anticipated net interest margin pressure from lower Fed and U.S. Treasury rates, combined with a shift towards co-brand products with lower yields, might squeeze profitability.
  
• Credit risks remain a concern, with a forecasted net loss rate of 8.0% to 8.2% indicating challenges in maintaining loan performance, which could affect the company’s profitability.
  
• The impact of macroeconomic uncertainty and potential rising unemployment could necessitate additional reserve builds, impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of $57.143 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 $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $401.5 million, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $48.44, the analyst price target of $57.14 is 15.2% 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.