A Bold Push Into Untapped Markets And High-Margin Loans

Key Takeaways

• Focus on higher-margin small loans and auto-secured loans to enhance revenue yields and manage credit loss rates effectively.
  
• Geographical expansion and expense management to generate incremental revenue and improve net margins and earnings.
  
• The company's focus on high-yield, high-risk loans and branch expansion faces challenges from external economic factors and natural events, risking future margins and growth.

Catalysts

A diversified consumer finance company, provides various installment loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other lenders in the United States.

• The company is incorporating a barbell strategy to optimize its portfolio, focusing on higher-margin small loans and auto-secured loans with lower risk, which is expected to enhance revenue yields and manage net credit loss (NCL) rates. This strategy improves overall portfolio yields and risk management, impacting revenue and NCL rates.
  
• Regional Management is observing an improved credit performance, with a 40 basis point decline in the net credit loss rate year-over-year, and the expectation of continued improvement in portfolio quality and credit performance into 2025. This expected credit improvement is likely to enhance net margins and earnings.
  
• There is planned geographical expansion with new branches opening in areas where the addressable market is largely untapped, which is anticipated to generate incremental revenue and drive growth into 2025 and beyond, impacting revenue growth and incremental volume.
  
• Management is strategically shifting its focus to higher-rate loans and optimizing its loan mix, which has led to an increase in interest and fee yields, raising the expectation that this shift will lead to higher margins and revenue growth in the future.
  
• The company is actively managing its expenses efficiently, with plans to maintain a stricter control on general and administrative (G&A) expenses while still investing in strategic growth initiatives. This expense discipline is expected to favorably impact net margins and earnings.

Regional Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Regional Management's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $96.4 million (and earnings per share of $9.37) by about November 2027, up from $23.7 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 5.2x on those 2027 earnings, down from 12.7x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.1x.
• Analysts expect the number of shares outstanding to grow by 0.41% 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.

Regional Management Future Earnings Per Share Growth

Risks

• The recent hurricane activities have led to significant provisions for credit losses and insurance claims, which could affect net margins and drag on third-quarter earnings. Future similar events could also impact earnings due to unexpected costs and disruptions.
  
• A substantial portion of the company's growth has come from higher-yield small loan products, which carry higher risks. While these loans contribute to revenue growth, they could negatively impact net credit loss rates and future net margins if defaults increase.
  
• The company is experiencing a shift toward higher-risk, higher-rate loans. Although this enhances interest and fee yield, it may affect credit performance if economic conditions worsen, impacting future earnings.
  
• Rising interest rates and competitive pressures could limit the company's ability to sustain its current pricing strategy, leading to potential margin compression and lower net income.
  
• The company's expansion strategy depends significantly on opening new branches. Execution risks, such as higher-than-expected costs or lower-than-expected returns from these branches, could impact future revenue and profitability.

Valuation

• The analysts have a consensus price target of $37.0 for Regional Management 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 $40.0, and the most bearish reporting a price target of just $33.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $718.9 million, earnings will come to $96.4 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $29.66, the analyst's price target of $37.0 is 19.8% 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.