Digital Transformation Will Improve Customer Experience And Support Future Earnings

Key Takeaways

• Strategic innovations and tightened underwriting enhance revenue growth, credit quality, and net margins while reducing future loan losses.
  
• Digital transformation reduces operational costs and boosts customer experience, supporting earnings through efficiency and customer acquisition.
  
• Rising interest expenses, increased operating costs, and competitive pressures could negatively impact OneMain Holdings' net margins, earnings, and capital generation amidst recession risks.

Catalysts

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

• OneMain Holdings is experiencing significant growth in origination volume, with a 13% year-over-year increase, driven by a constructive competitive environment and innovations in data analytics. This is likely to positively impact revenue growth.
  
• The company has tightened its underwriting standards and improved its credit quality over the last two years, leading to improving delinquency trends. This should enhance net margins by reducing future loan losses.
  
• OneMain's ability to increase pricing power, as evidenced by a 100 basis point increase in its consumer loan APR since Q2 2023, is expected to gradually support yields and improve net interest margins.
  
• OneMain's strategic investments in digital transformation and customer self-service features are reducing operational costs and improving customer experience, which is anticipated to positively impact earnings through higher efficiency and customer acquisition.
  
• Share repurchases, including the buyback of 420,000 shares this quarter, are expected to contribute to future earnings per share growth.

OneMain Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OneMain Holdings's revenue will grow by 32.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.0% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $10.9) by about January 2028, up from $548.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, down from 12.6x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

OneMain Holdings Future Earnings Per Share Growth

Risks

• The potential for a recession could negatively impact OneMain's expected reduction in peak losses, affecting earnings and capital generation.
  
• Increasing net charge-offs, which are still high at 7.5%, could eventually hinder profitability and earnings despite positive delinquency trends.
  
• Rising interest expenses due to increased average debt and higher cost of funds could pressure net margins and decrease earnings.
  
• Operating expenses have increased significantly, driven by acquisitions and investments for future growth, which could impact net margins if not managed well.
  
• Competition from banks and other lenders, as well as changes in macroeconomic conditions, could affect revenue by influencing both pricing power and origination growth.

Valuation

• The analysts have a consensus price target of $61.38 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 $78.0, 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 $5.7 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 10.9%.
• Given the current share price of $58.06, the analyst's price target of $61.38 is 5.4% higher. 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.