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Consumer Loans Industry Outlook: Near-Term Prospects Bright
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The Zacks Consumer Loans industry consists of firms that provide mortgages, refinancing, home equity lines of credit, credit cards, auto loans, student loans and personal loans, among others. Business prospects of these companies are sensitive to the nation’s overall economic health.
In addition to offering the above-mentioned services that help generate interest income — a major part of their revenues— many of these consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery for generating fee revenues.
Here are the three major themes in the industry:
Higher interest rates have been benefiting consumer loan providers, as interest income constitutes the majority of their revenues. Moreover, upbeat consumer confidence, improving economy and higher disposable income should keep driving the demand for products and services provided by these companies. Despite the Fed’s dovish stance related to future rate hikes, net interest margin and net interest income will likely continue to improve for these companies.
With the nation’s big credit reporting agencies — Equifax (EFX - Free Report) , Experian and TransUnion (TRU - Free Report) —removing all tax liens from consumer credit reports since last year, credit scores of some consumers have moved higher. This has increased the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet the increased demand for loans.
Growth in lending to subprime borrowers has led to increase in revenues for consumer loan providers. However, this has also resulted in higher provision for credit losses. Further, increase in delinquency rates for credit card and auto loan is a major concern for these companies.
Zacks Industry Rank Reflects Bright Prospects
The Zacks Consumer Loans Industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #17, which places it at the top 7% 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 continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised upward by 19%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past two years.
While the stocks in this industry have collectively gained 8.1% over this period, the Zacks S&P 500 composite and the Zacks Finance sector have rallied 23.3% and 9%, respectively.
Two-Year Price Performance
Industry’s Valuation
On the basis of price-to-tangible book ratio (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their earnings results from one quarter to the next, the industry currently trades at 1.32X. This compares to the highest level of 1.66X and median of 1.31X over the past five years.
This compares with the S&P 500’s trailing 12-month P/TBV of 11.38X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, 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 3.84X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
Bottom Line
Consumer loan stocks will likely continue benefiting from relatively higher interest rates, favorable operating environment and improving economy. Also, digitization of operations, efforts to diversify revenue sources, restructuring and solid asset quality (despite easing lending standards) will support profitability.
One should particularly consider betting on the consumer loan stocks that depict an upbeat earnings outlook.
We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and three with a Zacks Rank #2 (Buy) that investors may consider betting on.
EZCORP, Inc. (EZPW - Free Report) : The stock of this Austin, TX-based company has rallied 23.8/% over the past two years. The Zacks Consensus Estimate for the current-year earnings has been revised 1.1% upward over the past 30 days. The stock currently sports Zacks Rank #1.
Price and Consensus: EZPW
Navient Corporation (NAVI - Free Report) : The stock of Wilmington, DE-based company has lost 14.5% over the past two years. The consensus estimate for current-year earnings has been revised 5.1% upward over the past 30 days. The stock sports a Zacks Rank 1.
Price and Consensus: NAVI
Ally Financial Inc. (ALLY - Free Report) : The consensus estimate for this Detroit, MI-based company has moved 1.1% higher for current-year earnings, over the past 30 days. This Zacks Rank #2 stock has rallied 52.5% over the past two years.
Price and Consensus: ALLY
Credit Acceptance Corporation (CACC - Free Report) : The stock of this Southfield, MI-based company has surged 142.3% over the past two years. The Zacks Consensus Estimate for the current-year earnings has been revised 1% upward over the past 30 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: CACC
FirstCash, Inc. (FCFS - Free Report) : The consensus estimate for this Fort Worth, TX-based company has moved nearly 1% higher for current-year earnings, over the past 30 days. This Zacks Rank #2 stock has jumped 93.6% over the past two years.
Price and Consensus: FCFS
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This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
Image: Bigstock
Consumer Loans Industry Outlook: Near-Term Prospects Bright
The Zacks Consumer Loans industry consists of firms that provide mortgages, refinancing, home equity lines of credit, credit cards, auto loans, student loans and personal loans, among others. Business prospects of these companies are sensitive to the nation’s overall economic health.
In addition to offering the above-mentioned services that help generate interest income — a major part of their revenues— many of these consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery for generating fee revenues.
Here are the three major themes in the industry:
Zacks Industry Rank Reflects Bright Prospects
The Zacks Consumer Loans Industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #17, which places it at the top 7% 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 continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised upward by 19%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past two years.
While the stocks in this industry have collectively gained 8.1% over this period, the Zacks S&P 500 composite and the Zacks Finance sector have rallied 23.3% and 9%, respectively.
Two-Year Price Performance
Industry’s Valuation
On the basis of price-to-tangible book ratio (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their earnings results from one quarter to the next, the industry currently trades at 1.32X. This compares to the highest level of 1.66X and median of 1.31X over the past five years.
This compares with the S&P 500’s trailing 12-month P/TBV of 11.38X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, 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 3.84X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
Bottom Line
Consumer loan stocks will likely continue benefiting from relatively higher interest rates, favorable operating environment and improving economy. Also, digitization of operations, efforts to diversify revenue sources, restructuring and solid asset quality (despite easing lending standards) will support profitability.
One should particularly consider betting on the consumer loan stocks that depict an upbeat earnings outlook.
We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and three with a Zacks Rank #2 (Buy) that investors may consider betting on.
You can see the complete list of today’s Zacks #1 Rank stocks here.
EZCORP, Inc. (EZPW - Free Report) : The stock of this Austin, TX-based company has rallied 23.8/% over the past two years. The Zacks Consensus Estimate for the current-year earnings has been revised 1.1% upward over the past 30 days. The stock currently sports Zacks Rank #1.
Price and Consensus: EZPW
Navient Corporation (NAVI - Free Report) : The stock of Wilmington, DE-based company has lost 14.5% over the past two years. The consensus estimate for current-year earnings has been revised 5.1% upward over the past 30 days. The stock sports a Zacks Rank 1.
Price and Consensus: NAVI
Ally Financial Inc. (ALLY - Free Report) : The consensus estimate for this Detroit, MI-based company has moved 1.1% higher for current-year earnings, over the past 30 days. This Zacks Rank #2 stock has rallied 52.5% over the past two years.
Price and Consensus: ALLY
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Credit Acceptance Corporation (CACC - Free Report) : The stock of this Southfield, MI-based company has surged 142.3% over the past two years. The Zacks Consensus Estimate for the current-year earnings has been revised 1% upward over the past 30 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: CACC
FirstCash, Inc. (FCFS - Free Report) : The consensus estimate for this Fort Worth, TX-based company has moved nearly 1% higher for current-year earnings, over the past 30 days. This Zacks Rank #2 stock has jumped 93.6% over the past two years.
Price and Consensus: FCFS
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>