Branch Expansion And Credit Improvements Will Shape Future Success

Key Takeaways

• Regional Management focuses on portfolio growth through investments and branch expansion, aiming to drive significant revenue increases.
  
• Stronger credit performance and expense management are expected to improve net margins and boost overall earnings.
  
• Planned growth initiatives and economic uncertainties may strain short-term net income and credit performance, despite potential for long-term revenue enhancement.

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.

• Regional Management is prioritizing portfolio growth by ramping up investment spending and opening new branches, aiming for a minimum of 10% growth in 2025, which is expected to drive future revenue increases.
  
• The company is experiencing improved credit performance due to tighter underwriting practices in its recent originations, which should positively affect net margins and overall earnings.
  
• An increased focus on higher-margin loans, such as auto-secured loans and loans with higher APRs, is expected to boost revenue yields despite higher expected net credit losses.
  
• The company is managing expenses well, maintaining flat G&A expenses, and improving its operating expense ratio, which is anticipated to positively impact net margins and overall earnings.
  
• Regional Management is leveraging its balance sheet by maintaining a strong capital position and implementing a $30 million share repurchase program, expected to enhance earnings per share (EPS) over time.

Regional Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Regional Management's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 14.5% in 3 years time.
• Analysts expect earnings to reach $112.2 million (and earnings per share of $12.08) by about March 2028, up from $41.2 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 4.6x on those 2028 earnings, down from 7.1x 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 0.65% 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.

Regional Management Future Earnings Per Share Growth

Risks

• Regional Management's planned portfolio growth in 2025, while expected to drive future revenue, will create an immediate drag on net income due to the associated expenses of provisioning for lifetime credit losses at origination under the CECL model. This dynamic could negatively impact short-term earnings.
  
• The increased investment in opening new branches and accelerating growth, although aimed at improving long-term returns, could lead to higher G&A expenses in the short term, potentially impacting net margins.
  
• The focus on expanding higher-margin, greater than 36% APR loan portfolios, while beneficial for revenue yields, may also increase delinquency and net credit loss rates, impacting overall portfolio quality and net earnings.
  
• Rising interest rates and a shift towards more variable rate debt as fixed-rate funding matures could increase interest expenses, putting pressure on net income and constraining profitability.
  
• Economic uncertainties, such as potential inflationary pressures or changes in unemployment rates, may adversely affect credit performance and consumer demand, creating risks to revenue and overall financial performance.

Valuation

• The analysts have a consensus price target of $41.75 for Regional Management based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $776.4 million, earnings will come to $112.2 million, and it would be trading on a PE ratio of 4.6x, assuming you use a discount rate of 11.4%.
• Given the current share price of $29.66, the analyst price target of $41.75 is 29.0% 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.