Strategic Expansions And Disciplined Growth Propel Profitability In Consumer Finance

Key Takeaways

• Expanding into auto-secured loans and carefully managing credit quality reflects a strategic approach to boosting future earnings while controlling risk.
  
• Investments in new branches and technology underscore a commitment to long-term growth through increased loan origination volumes and operational efficiency.
  
• Expansion and shift towards high-margin small loans and auto-secured products increase risk of higher net credit losses and regulatory challenges, impacting profitability.

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 has demonstrated strong net income and EPS growth, driven by disciplined growth in their high-margin small loan portfolio and strategic expansions into auto-secured loans, which is expected to impact future earnings positively.
  
• The company is capitalizing on increased demand for its small loan products from highly qualified applicants, due to tighter credit conditions elsewhere, suggesting potential for revenue growth as these customers transition to larger, lower-rate loans over time.
  
• Investments in new branch openings and technology suggest a focus on long-term growth and efficiency improvements, aiming to increase origination volumes and improve operational productivity, which could lead to higher revenue and net margins.
  
• A cautious yet proactive approach to managing credit quality, including maintaining conservative underwriting standards and adopting a balanced product mix, aims to ensure stable future earnings by carefully managing risk.
  
• Regional Management's focus on expanding its addressable market by entering new states and offering a diversified loan product mix is designed to capture a wider customer base and drive portfolio growth, contributing to an increase in future revenue and profitability.

Assumptions

• Analysts are assuming Regional Management's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 12.7% in 3 years time.
• Analysts expect earnings to reach $89.7 million (and earnings per share of $7.51) by about September 2027, up from $24.9 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 6.1x on those 2027 earnings, down from 13.5x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.8x.
• Analysts expect the number of shares outstanding to grow by 3.24% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• Higher expected net credit losses (NCL) as a result of the company's growth in their high-margin small loan portfolio, which could affect profitability and increase provisions for loan losses.
  
• The possibility of an economic downturn could impact the company's customers, particularly those with weaker credit profiles who are the target of their high-margin small loan products, potentially leading to increased loan defaults and negatively impacting revenue.
  
• The company's strategic shift towards higher rate small loans and auto-secured products could face regulatory risks or pushback, impacting the availability of these products and thus revenue.
  
• Inflation and its slower-than-expected improvement could further strain the customer base, affecting their ability to repay loans and thus increasing the company's provision for loan losses.
  
• The company's expansion into new geographical areas and opening of new branches as part of growth strategy could lead to higher operational and administrative expenses, impacting net margins if the growth in revenue does not outpace the increase in expenses.

Valuation

• The analysts have a consensus price target of $36.33 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 $703.9 million, earnings will come to $89.7 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 10.7%.
• Given the current share price of $33.09, the analyst's price target of $36.33 is 8.9% 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.