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Low Rates to Mar Consumer Loans Industry Near-Term Prospects

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The Zacks Consumer Loans industry comprises firms that offer mortgages, refinancing, home equity lines of credit, credit cards, auto loans, student loans and personal loans, among others. Prospects of these companies are sensitive to the nation’s overall economic health.

In addition to offering the above-mentioned products and services that help generate interest income — a major part of their revenues — many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery for generating fee revenues.

A couple of prominent stocks in this industry are Discover Financial Services DFS and Capital One COF.

Here are the three major themes in the industry:

  • Upbeat consumer confidence, improving economy and higher disposable income should keep driving demand for products and services provided by consumer loan companies. However, the Federal Reserve’s indications of keeping interest rates unchanged this year will hamper these companies’ net interest margin and net interest income growth despite a rise in demand for loan on the back of lower rates.
  • Growth in lending to subprime borrowers has resulted in an increase in revenues for consumer loan providers. However, this has led to higher provision for credit losses, thereby hurting bottom-line growth to some extent. Further, increase in delinquency rates for credit card and auto loan is a major concern for these companies.
  • With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, 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.


Zacks Industry Rank Reflects Dull 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 #195, which places it at the bottom 23% 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 outperforms 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 weak 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. Over the past year, the industry’s earnings estimates for the current year have been revised 3.2% downward.

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 three years.

While the stocks in this industry have collectively gained 1.8% over this period, the Zacks S&P 500 composite and the Zacks Finance sector have rallied 44.9% and 16%, respectively.'

Three-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 1.55X and median of 0.96X over the past five years.

This compares with the S&P 500’s trailing 12-month P/TBV of 12.50X, 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 3.28X 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

Though consumer loan stocks are likely to continue benefiting from increasing loan demand, digitization of operations and improving economy, lower interest rates pose a major near-term concern. This is expected to hurt top-line growth to some extent. Also, easing lending standards are likely to lead to a rise in credit costs and delinquency rates.

Despite these concerns, one can have a look at the consumer loan stocks that depict an upbeat earnings outlook.

We are presenting one stock with a Zacks Rank #1 (Strong Buy) and two stocks 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.

Elevate Credit, Inc. ELVT: The stock of this Fort Worth, TX-based company has rallied 7.3% over the past six months. The Zacks Consensus Estimate for 2020 earnings suggests growth of 21.3% on a year-over-year basis. The stock sports a Zacks Rank #1.

Price and Consensus: ELVT


Regional Management Corp. RM: The stock of Greer, SC-based company has gained 7.8% over the past six months. The company's 2020 earnings are expected to rise 15.9% year over year. The stock, currently, has a Zacks Rank of 2.

Price and Consensus: RM


Ally Financial Inc. (ALLY - Free Report) : Earnings for 2020 for this Detroit, MI-based company are anticipated to improve 12.9%. This Zacks Rank #2 stock has rallied 19.4% over the past year.

Price and Consensus: ALLY


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