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Top 3 Stocks to Buy From the Prospering Consumer Loan Industry

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The Zacks Consumer Loans industry is bearing the brunt of low interest rates. While the economy is re-opening and gaining traction, muted consumer sentiments due to inflation concerns are likely to hurt demand for consumer loans in the near term.

Yet, easing lending standards, which have increased the number of clients eligible for consumer loans, and stimulus packages are likely to keep providing much needed support to these companies. Also, digitization of operations will boost operating efficiency. Industry players including Discover Financial Services (DFS - Free Report) , Credit Acceptance Corporation (CACC - Free Report) and Navient Corporation (NAVI - Free Report) will benefit from these favorable developments.

About the Industry

The Zacks Consumer Loans industry comprises firms that provide mortgages, refinancing, home equity lines of credit, credit cards, auto loans, student loans and personal loans, among others. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic health. In addition to offering the above-mentioned products and services that help generate net interest income, which form an important part of total revenues, several consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery as well. These support the companies in generating fee revenues. Further, this help the companies in diversifying revenue sources and be less dependent on the vagaries of the economy.

3 Key Trends Shaping the Future of Consumer Loan Industry

Asset Quality Gets Boost From Stimulus Packages: Since last March, the U.S. administration has been providing financial assistance to individuals in the form of tax breaks and deductions, mortgage forbearance and additional unemployment benefits, among others, through various stimulus packages. Backed by these, along with extensive vaccination drive, economic growth is expected to witness solid momentum in the later part of 2021. Thus, these are expected to help consumer loan providers in not witnessing substantial rise in delinquency rates.

Easing Lending Standards Offer Support: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, credit scores of several 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 increased demand for loans.

Low Rates and Weak Consumer Sentiment Weigh on Performance: The Federal Reserve cut interest rates to near zero in March 2020 with an aim to support the U.S. economy from coronavirus-induced slowdown. In the April FOMC meeting, the central bank signaled no change in rates anytime soon. Also, weak consumer sentiments owing to expected rise in inflation are likely to hurt loan demand to some extent. Thus, growth in net interest margin and net interest income for consumer loan companies is expected to be hampered in the near term.

Zacks Industry Rank Reflects Solid 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 #35, which places it at the top 14% 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 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 encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since December 2020-end, the industry’s earnings estimates for 2021 have soared 78.8%.

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 vs. Broader Market

The Zacks Consumer Loans industry has substantially outperformed both the Zacks S&P 500 composite and its own sector over the past year.

The stocks in this industry have collectively jumped 105.6% over this period, while the Zacks S&P 500 composite and Zacks Finance sector have rallied 40.6% and 45.8%, respectively.

One-Year Price Performance

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 1.42X. The highest level of 1.50X 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 17.78X, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

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 4.58X 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)

3 Consumer Loan Providers to Bet on

Discover Financial: This Zacks Rank #1 (Strong Buy) stock is a direct banking and payment services company. Headquartered in Riverwoods, IL, the company offers credit cards, personal, student and home loans as well as deposit products.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Strong growth opportunities in card loans and rebounding sales volumes are expected to aid the company’s financials, given the robust economic recovery and improved consumer spending. Further, Discover Financial’s revenues are expected to improve on the back of its solid market position, expansion in the global payments business and an attractive core business.

Additionally, the company took certain cost-controlling initiatives last year in response to the coronavirus pandemic. Based on its prudent expense management efforts, Discover Financial projects expenses (excluding marketing costs) to remain relatively flat for 2021.

Further, Discover Financial boasts a robust balance sheet, which is likely to support its capital deployment plans. After suspending share repurchases in early 2020, the company resumed the same in January. The board of directors approved a $1.1-billion share buyback plan. Also, the company pays regular quarterly dividend. Notably, management plans to accelerate buybacks in second-quarter 2021 and boost capital returns during the second half of the year.

Its shares have rallied 44.3% over the past six months. The company’s earnings for 2021 are projected to surge 272.5%.

Price and Consensus: DFS

Credit Acceptance Corporation: Headquartered in Southfield, MI, the company offers financing programs, and related products and services to automobile dealers in the United States, enabling them to sell vehicles to consumers irrespective of their credit history. Also, it is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by dealers on vehicles financed by the company.

With the economy re-opening and gaining solid momentum, the company’s finance charges are likely to continue improving supported by rise in demand for auto loans. Further, a decent rise in dealer enrolments and active dealers is expected to support top-line growth.

The company’s earnings are expected to jump 67.9% for 2021. Nonetheless, shares of this Zacks Rank #2 (Buy) stock have appreciated 26% over the past six months.

Price and Consensus: CACC

Navient Corporation: This Zacks Rank #1 stock is a leading provider of education loan and business processing solutions. Headquartered in Wilmington, DE, the company is one of the leading servicers to the U.S. Department of Education under its Direct Student Loan Program.

Focus on introducing new products leveraged with technology, cost control efforts and inorganic expansion strategy will continue supporting Navient in the quarters ahead. Also, the economic recovery and declining unemployment rate are likely to further enhance its business prospects.

Its shares have jumped 104.6% over the past six months. The company’s earnings are projected to grow 29.9% this year.

Price and Consensus: NAVI

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See More Zacks Research for These Tickers

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Discover Financial Services (DFS) - free report >>

Credit Acceptance Corporation (CACC) - free report >>

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