Data Science Implementation Will Improve Underwriting Capabilities In Personal Loans

Key Takeaways

• Strategic growth in auto lending, credit cards, and personal loans, with improved credit models, is set to boost revenue and net margins.
  
• Financial flexibility from a robust balance sheet and diversified funding supports strategic growth and capital generation.
  
• Macro factors like inflation and unemployment pose risks to consumer affordability and credit performance, impacting OneMain's earnings and profitability amid fluctuating economic conditions.

Catalysts

A financial service holding company, engages in the consumer finance and insurance businesses in the United States.

• The acquisition of Foursight and growth in auto lending are expected to enhance revenue streams by expanding OneMain's product offerings and increasing their receivables in the auto sector.
  
• Implementation of data science, new data sources, and advanced credit models in personal loans are projected to improve underwriting capability, leading to better pricing and potentially higher net margins.
  
• The build-out of BrightWay credit cards and enhancements in customer experience are positioned to drive growth in higher-margin credit card receivables, positively impacting revenue and earnings.
  
• Improved credit performance trends and proactive credit management are expected to lead to a reduction in net charge-offs and lower loan losses, thereby improving net margins.
  
• A strong balance sheet and diversified funding program are anticipated to provide OneMain with the financial flexibility needed for strategic growth opportunities and capital generation, enhancing future earnings and shareholder returns.

OneMain Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OneMain Holdings's revenue will grow by 32.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.4% today to 20.9% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $10.31) by about March 2028, up from $509.0 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 8.3x on those 2028 earnings, down from 11.3x 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 0.37% 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.

OneMain Holdings Future Earnings Per Share Growth

Risks

• Concerns about macroeconomic factors such as inflation and unemployment, coupled with OneMain's caution regarding changes in the macroeconomic environment, could pose risks to consumer affordability and credit performance, potentially impacting net charge-offs and overall earnings.
  
• The company's reliance on sustaining improved delinquency and charge-off metrics to deliver improved earnings underscores potential vulnerability if these credit trends worsen due to unforeseen economic shifts, affecting profitability.
  
• Future capital generation and earnings projections hinge on the successful management and roll-off of the back book, which still represents a significant share of delinquencies, posing a risk to net margins if these efforts encounter challenges.
  
• Though the company is generating significant capital despite incurring peak loan losses, its reliance on high C&I net charge-off metrics (7.5% to 8.0%) reflects a potential risk if economic conditions deteriorate, potentially impacting future revenue streams and profitability.
  
• Interest expense is expected to rise slightly due to increases in average debt levels, even with effective rate management, which could negatively affect net income if the interest rate environment becomes more volatile than anticipated.

Valuation

• The analysts have a consensus price target of $61.923 for OneMain 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 $74.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $1.2 billion, 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 $48.34, the analyst price target of $61.92 is 21.9% 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.