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Near-Term Outlook for Consumer Loans Industry Remains 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. The 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 -- the 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:

  • Rising interest rates have been benefiting consumer loan providers, as interest income constitutes the majority of their revenues. The expected continuation of the rising rate environment should keep driving net interest margin expansion and consequent growth in interest income for these companies. Moreover, upbeat consumer confidence, improving economy and higher disposable income should keep driving the demand for products and services provided by these companies.
     
  • With the nation’s giant credit reporting agencies — Equifax (EFX - Free Report) , Experian (EXPGY - Free Report) and TransUnion (TRU - Free Report) — removing all tax liens from consumer credit reports effective Apr 16, 2018, credit scores of some consumers have headed higher. This has increased the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers though enhanced demand for loans.
     
  • Growth in lending to subprime borrowers has led to increase in revenues for consumer loan providers, but 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 #64, which places it at the top 25% 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 25.5%.

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 lost 15.2% over this period, the Zacks S&P 500 composite and the Zacks Finance sector have rallied 17.5% and 2.5%, 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 1.12X. This compares to the highest level of 1.47X and median of 1.33X over the past five years.

This compares with the S&P 500’s trailing 12-month P/TBV of 9.99X, 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 2.80X 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 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 one 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.

Credit Acceptance Corp. (CACC - Free Report) : The stock of this Southfield, MI-based company has surged 82.1% over the past two years. The Zacks Consensus Estimate for the current-year EPS has been revised 3.4% upward over the past 60 days. The stock currently sports Zacks Rank #1.

Price and Consensus: CACC

Enova International, Inc. (ENVA - Free Report) : The stock of Chicago-based company has jumped 56% over the past two years. The consensus EPS estimate for the current year has been revised 2.8% upward over the past 60 days. The stock sports a Zacks Rank #1.

Price and Consensus: ENVA

Ally Financial Inc. (ALLY - Free Report) : The consensus EPS estimate for this Detroit, MI-based company has moved 4.2% higher for the current year, over the past 60 days. This Zacks Rank #2 stock has rallied 21.7% over the past two years.

Price and Consensus: ALLY

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