Zacks Industry Outlook Highlights Enova International and Regional Management
For Immediate Release
Chicago, IL – October 18, 2022 – Today, Zacks Equity Research discusses Enova International, Inc. ENVA and Regional Management Corp. RM.
Industry: Consumer Loan
Link: https://www.zacks.com/commentary/1992556/2-consumer-loan-stocks-to-buy-despite-industry-headwinds
The Zacks Consumer Loans industry continues to bear the brunt of weak consumer sentiments, mainly attributable to inflation, geopolitical matters and recessionary fears. This will, therefore, gradually dampen the demand for consumer loans and hurt top-line growth. Weakening asset quality as economic growth continues to slow down remains a major headwind.
Nonetheless, easing lending standards, which have increased the number of clients eligible for consumer loans and digitization of operations, will keep benefiting industry players. Hence, companies like Enova International, Inc. and Regional Management Corp. are worth considering despite industry challenges.
About the Industry
The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments.
In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
3 Themes Shaping Consumer Loan Industry's Prospects
Subdued Consumer Sentiments: The ongoing Russia-Ukraine conflict, supply-chain disruptions and raging inflation (persistently being above 8%) continue to weigh heavily on consumer sentiments. Despite this, the Conference Board Consumer Confidence Index and the Expectations Index (which shows a six-month outlook) increased in September. But this seems to be largely supported by “jobs, wages, and declining gas prices.”
Lynn Franco, senior director of economic indicators at The Conference Board, said, “The Present Situation Index rose again, after declining from April through July. The Expectations Index also improved from summer lows, but recession risks nonetheless persist. Concerns about inflation dissipated further in September — prompted largely by declining prices at the gas pump — and are now at their lowest level since the start of the year.”
Consumer spending is likely to face headwinds from inflation and rising interest rates in the coming months. This will thereby result in lower demand for consumer loans. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be hampered.
Credit Quality May Worsen: Since March 2020, the U.S. administration has provided substantial financial assistance to individuals through various packages to overcome pandemic-related challenges. However, with the stimulus packages gradually stopping and the Federal Reserve signaling continued monetary policy tightening ahead to tame inflation, there is a strong likelihood that the U.S. economy might be slipping into a recession in the next six-nine months.
Also, going by the central bank’s latest Summary of Economic Projections, the U.S. economy will grow 0.2% in 2022 and 1.2% in 2023, lower than the prior projection of 1.7% rise for both 2022 and 2023. These factors may severely curtail the consumers’ ability to pay back loans. Thus, consumer loan providers will have to build additional reserves to tide over unexpected defaults and payment delays owing to the economic slowdown. This will, thereby, lead to a deterioration in industry players’ asset quality.
Easing Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet loan demand.
Zacks Industry Rank Reflects Gloomy Prospects
The Zacks Consumer Loans industry is a 17-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #149, which places it at the bottom 41% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a disappointing earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since May 2022-end, the industry’s earnings estimates for the current year have moved 4.4% lower.
Before we present a few stocks that you may want to add to your portfolio despite industry headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry vs. Broader Market
The Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year.
The stocks in this industry have collectively lost 39.2% over this period while the Zacks S&P 500 composite and Zacks Finance sector have declined 21.2% and 21%, respectively.
Industry's Current Valuation
On the basis of price-to-tangible book (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their results from one quarter to the next, the industry currently trades at 0.96X. The highest level of 1.54X and a median of 1.20X are recorded over the past five years.
This compares with the S&P 500’s trailing 12-month P/TBV of 9.14X, as the chart below shows.
As finance stocks typically have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 4.08X for the same period is way above the Zacks Consumer Loan industry’s ratio.
2 Consumer Loan Stocks Overcoming Industry Challenges
Enova International: Based in Chicago, IL, Enova is a leading financial technology company that provides online financial services. The company currently provides its services in the United States, the United Kingdom, Canada, Australia and Brazil. ENVA caters to small businesses and capitalizes on its proprietary technology, analytics and customer service capabilities to underwrite and fund loans.
Being an early entrant into online lending, the company has completed more than 56 million customer transactions and collected almost 61 terabytes of consumer behavior data since its launch in 2004. This has enabled Enova to better analyze its specific customer base.
Also, the company has been diversifying its operations. Some of ENVA’s financing products and services are installment loans, line of credit accounts and receivables purchase agreements. Also, the company has undertaken acquisitions to further improve its market share.
This Zacks Rank #1 (Strong Buy) company’s proprietary underwriting systems leverage advanced risk analytics, including machine learning and artificial intelligence. ENVA has provided more than 7 million customers with more than $40 billion in loans to enhance their financial health.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Enova International believes in returning capital to shareholders through stock repurchases instead of paying dividends. In February 2022, it authorized $100 worth of buyback authorization, which is set to expire on Jun 30, 2023.
Shares of ENVA have declined 23.5% so far this year. While the company’s earnings are projected to decline 12.3% this year, the trend will likely reverse after that. For 2023, earnings are expected to grow 11.3%.
Regional Management: Based in Greer, SC, RM provides small loans, large loans, retail loans, and related payment and collateral protection insurance products to customers with “ less-than-perfect credit profiles.” The company operates through more than 330 branch locations under the name “Regional Finance” across 17 states.
RM’s total finance receivables have witnessed a five-year CAGR of 14.4% (ended 2021). This resulted in a robust rise in total revenues, which recorded a CAGR of 12.2% over the same time period. The company has been expanding its operations rapidly by opening branches in new and existing states. It intends to expand the operations to “at least five more states” this year-end from 2021 level.
Regional Management is also expanding/improving digital capabilities that will allow it to improve efficiencies, boost the customer experience and test new mechanisms for lead generation, all of which will help diversify and strengthen new business acquisition opportunities.
Unlike Enova International, RM believes in returning capital to shareholders through regular dividend payouts. The company initiated dividend payments in October 2020 and since then has hiked the same twice. At present, the company pays 30 cents per share as a quarterly dividend.
This Zacks Rank #2 (Buy) stock has plunged 50.2% in the year-to-date period. While the company’s earnings are projected to decline 21.7% for 2022, the same is expected to grow 11.2% next year.
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