Optimized Underwriting And Diversified Products Will Secure Future Success

Key Takeaways

• Tightened underwriting standards and optimized pricing are leading to improved credit metrics, enhancing future earnings and capital generation.
  
• Strategic expansion in product offerings and strong originations growth are expected to drive long-term revenue growth and market reach.
  
• Uncertain ILC licensing, high charge-offs, rising interest expenses, and macroeconomic factors threaten OneMain's revenue, profitability, and competitive positioning.

Catalysts

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

• OneMain Holdings has tightened its underwriting standards and optimized pricing, leading to improved credit metrics and capital generation, which is expected to enhance future earnings.
  
• The company is seeing strong growth in originations, particularly in high-quality segments, which is anticipated to drive future revenue and expand its customer base.
  
• OneMain is strategically expanding its product offerings, such as BrightWay credit cards and Auto Finance, which are expected to contribute to long-term revenue growth and diversification.
  
• Positive delinquency and charge-off trends are projected to improve credit performance, potentially lowering future charge-offs and enhancing net margins.
  
• The potential formation of an industrial loan company (ILC) could provide strategic advantages by expanding market reach and optimizing funding costs, potentially improving net margins and capital generation.

OneMain Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OneMain Holdings's revenue will grow by 37.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.0% today to 18.2% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $9.55) by about May 2028, up from $567.0 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 7.8x on those 2028 earnings, down from 10.2x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 0.7% 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

• The uncertainty of obtaining an industrial loan company (ILC) license could potentially limit OneMain's ability to expand market reach and drive capital generation, impacting future revenue and profitability.
  
• The high credit card net charge-off rate, currently at 19.8%, poses a risk to net margins if these rates continue or worsen, despite expectations for improvement in the future.
  
• Rising interest expense, due to increased average debt and higher cost of funds, could pressure net margins and earnings if funding costs do not stabilize or decrease.
  
• The macroeconomic uncertainty, including potential changes in inflation and unemployment, could impact credit performance. Despite existing stress buffers, negative economic shifts could affect net charge-offs and ultimately reduce earnings.
  
• Potential changes in competitive dynamics, especially with other lenders having access to capital, could lead to pricing pressures that might impact OneMain's ability to sustain or improve revenue growth and yields.

Valuation

• The analysts have a consensus price target of $58.857 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 $48.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.7 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 11.4%.
• Given the current share price of $48.4, the analyst price target of $58.86 is 17.8% 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.