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4 Top Consumer Loan Stocks to Buy From a Booming Industry

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The Zacks Consumer Loans industry continues to bear the brunt of low interest rates. Though the economic growth is gaining traction, soft consumer sentiments are likely to hamper consumer loan demand.

Nonetheless, easing lending standards, which have increased the number of clients eligible for consumer loans, and improving asset quality are likely to continue providing much-needed support to these companies. Also, digitization of operations will boost operating efficiency. Industry players including Capital One Financial Corporation (COF - Free Report) , Discover Financial Services (DFS - Free Report) , Ally Financial Inc. (ALLY - Free Report) , and Credit Acceptance Corporation (CACC - Free Report) will gain from such developments.

About the Industry

The Zacks Consumer Loans industry comprises firms 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 in generating net interest income (NII), which forms a major part of total revenues. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in several other businesses like commercial lending, insurance, loan servicing, and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms in diversifying revenue sources and be less dependent on the vagaries of the economy.

3 Key Themes Shaping the Future of Consumer Loan Industry

Asset Quality Shows Signs of Improvement: Since last March, the U.S. administration has been providing substantial financial assistance to individuals through various packages. Backed by these, along with extensive vaccination drive, economic growth is expected to continue at a solid pace. Going by the Federal Reserve’s latest Summary of Economic Projections, the U.S. economy will grow at 5.9% in 2021, 3.8% in 2022, and 2.5% in 2023. Thus, the favorable developments have led consumer loan providers to release reserves (that they had built in the early part of 2020 to tide over unexpected defaults and payment delays owing to the economic slowdown resulting from the coronavirus mayhem) back into the income statement. Further, the government stimulus package and support from the central bank are expected to keep aiding the industry players’ asset quality in the near term.

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. Additionally, easing credit lending standards are helping consumer loan providers to meet increased demand for loans.

Low Rates and Weak Consumer Sentiment Hurt NII Growth: The Fed cut interest rates to near zero in March 2020 with an aim to support the U.S. economy from coronavirus-induced slowdown. In the September FOMC meeting, the central bank signaled no change in rates at least till the later part of 2022. Also, the Conference Board Consumer Confidence Index fell again in September, following declines in both July and August. The steady fall can be attributed to inflationary levels, rising COVID-19 cases, and supply-chain challenges. Thus, weak consumer sentiments could lower the pace of loan demand. Thus, these factors are likely to hurt growth in net interest margin and net interest income for consumer loan companies.

Zacks Industry Rank Reflects Robust Prospects

The Zacks Consumer Loans industry is a 21-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #60, which places it at the top 24% 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 outperform 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 122.3%.

Before we present a few stocks that you may want to add to 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 95.9% over this period while the Zacks S&P 500 composite and Zacks Finance sector have rallied 32.4% and 40.4%, 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 1.49X. The highest level of 1.55X and a median of 1.22X are recorded over the past five years.

This compares with the S&P 500’s trailing 12-month P/TBV of 16.96X, 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 4.45X 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)

 

4 Consumer Loan Providers to Buy Now

Capital One: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending as well as deposit origination. Strength in credit card and online banking operations, decent loan growth, robust balance sheet position, and strategic inorganic expansion initiatives will keep supporting Capital One’s profitability despite low interest rates and worsening asset quality.

The Credit Card segment is likely to continue showing strength. The Walmart partnership and the 2017 acquisition of Cabela's Incorporated’s credit card operations bode well for the future. Strong growth opportunities in card loans and purchase volumes are expected despite an intensely competitive environment.

This Zacks Rank #2 (Buy) company has an impressive capital deployment plan. After slashing quarterly dividend by 75% last year based on the Fed’s requirements, it restored it to 40 cents per share in the first quarter of 2021. Further, in July, Capital One hiked the same by 50% and also announced a special dividend of 60 cents per share. The company has also authorized a share repurchase program of up to $7.5 billion for 2021.

The company’s earnings are expected to jump 374.6% for 2021. Also, its shares have appreciated 130.3% over the past year..

Price and Consensus: COF

Discover Financial: This Zacks Rank #2 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 (Strong Buy) 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. Discover Financial’s revenues are expected to improve on the back of its solid market position, expansion in the global payments business and attractive core business.

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. Further, in July, the board of directors approved a new $2.4-billion share buyback plan and also hiked its quarterly dividend by 13.6%.

Its shares have surged 116.5% over the past 12 months. The company’s earnings for 2021 are projected to surge 375.6%.

Price and Consensus: DFS

Ally Financial: This Zacks Rank #2 stock offers a broad array of financial products and services primarily to automotive dealers and their customers. Headquartered in Detroit, MI, the company has been trying to diversify its revenue base and improve product offerings.

Ally Financial has forayed into the mortgage business and is also making efforts to enhance digital products and offerings to further boost its profitability. The company’s wealth management and online brokerage initiatives related to credit card offerings remain impressive.

The company has robust capital deployment activities. In July, Ally Financial announced a 31.6% dividend hike. The company has also announced a share repurchase plan, under which it is authorized to buy back up to $2 billion worth of shares in 2021 (replacing the previous authorization worth $1.6 billion announced this January).

Over the past year, its shares have jumped 96.2%. The company’s earnings are projected to increase 171% this year.

Price and Consensus: ALLY

Credit Acceptance: 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.

Growth in revenues, primarily driven by an increase in auto loans, along with an upsurge in dealer enrolments, remains a major positive for Credit Acceptance. With the economy re-opening and gaining solid momentum, the company’s finance charges are likely to continue improving supported by a 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 121.9% for 2021. Also, shares of this Zacks Rank #1 stock have appreciated 81.8% over the past year.

Price and Consensus: CACC