Your 6.5 P/E assumes EPS holds - It won't. My preliminary view is that EPS will likely go below 40c/q over the next 4 Qs. Expect provision to ramp back to 1MM soon. Could be worse if Manheim used car price index goes below 115.
This should be no surprise though - Well telegraphed tough environment with a) Peter's Performance hurdles lowered for bonus (see proxy), b) CFO selling a few months back, c) Origination volume struggling due to white hot competition and d) Dealer Discount getting sacrificed.
Peter needs to keep increasing the dividend to return capital to the shareholders. He won't though due to the unknown of the down cycle that the industry is entering.
I assume your question 'How can you be sure a down cycle is coming.' relates to my prior comment that I expect EPS to fall below 40c/q over the next 4 Q's?
If so I base it mainly on the increased provisioning required against the loan book. This will be the main driver of lower EPS.
This is based on the following:
- Delinquencies are now pushing to the lower bound of the last recession. This means more repossessions and sales.
- Manheim index is falling. This means less money recovered on each sale.
- Dealer discount getting cut. This means less money put into the allowance for loan loss as a buffer to absorb losses. (!00% of dealer discount is put towards covering loan losses)
- Current allowance against gross financials receivables is probably getting close the limit Peter is willing to take it. This means reserve releases over the last 6Qs is coming to an end.
Based on the above I expect 1MM+ provisions to start to kick back in over the next 4Qs. This reduces EPS. Dividend should support the stock though; just means P/E expands.
The next dividend was declared today. They stated they intend to pay it, but it can't be guaranteed. What dividend is though?
There is weakness across the board, across all stocks. Look at AAPL, DELL, CSCO, STX, GES, BEBE, DSX, and on and on...
My nightmare scenario is either a replay of 2008 OR
Things go down a bit, the economy goes down a bit too, but capital goes on strike.
The market's P/E ratio contracts to 7 or 8. A lot of stocks sell for 4,5,6 times depressed earnings.
I was at the coin shop today. I bought some silver. I was "small fry". Guy at the counter next to me bought 500 1oz. "silver eagles". Woman to my other side bought almost 8 oz of gold coins. There were 7 people in line when I left.
People are spooked. They don't know what is coming down the pipeline.