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The Zacks Consumer Loans industry continues to bear the brunt of "sticky" inflation and recessionary fears. Deteriorating asset quality as economic growth slows down is a major headwind.
Yet, easing lending standards, which have increased the number of clients eligible for consumer loans and digitization of operations will keep benefiting industry players. Also, improving consumer confidence and spending rise on non-discretionary categories will result in decent loan demand. Hence, companies like Credit Acceptance Corp., SLM Corp. and Navient Corp. are worth betting on.
About the Industry
The Zacks Consumer Loans industry comprises companies 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 generate net interest income (NII), which forms the most important part of total revenues.
Prospects of the companies in this industry are highly sensitive to the nation's overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
Improving Consumer Sentiments: The persistent inflation (though now somewhat cooling), recent bank runs, ongoing Russia-Ukraine conflict and supply-chain disruptions continue to weigh heavily on consumer sentiments. Despite this, the Conference Board Consumer Confidence Index and the Expectations Index (which shows a six-month outlook) increased in March. Ataman Ozyildirim, Senior Director, Economics at The Conference Board, said, "Driven by an uptick in expectations, consumer confidence improved somewhat in March, but remains below the average level seen in 2022 (104.5). The gain reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over."
While consumer spending on highly discretionary categories will face headwinds from inflation and higher interest rates in the coming months, spending on non-discretionary categories is expected to improve/remain stable. This will thereby result in decent demand for consumer loans. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be stable.
Easing Lending Standards: With the nation's big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet loan demand.
Credit Quality May Worsen: Since March 2020, the U.S. administration has provided substantial financial assistance to individuals through various packages to overcome pandemic-related challenges. However, with the stimulus packages gradually stopping and the Federal Reserve signaling continued monetary policy tightening to tame inflation, there is a strong likelihood that the U.S. economy might be slipping into a recession in the near term.
Also, going by the central bank's latest Summary of Economic Projections, the U.S. economy will grow 0.4% in 2023 and 1.2% in 2024, lower than the prior projection of 0.5% for this year and 1.6% for the next. These factors may severely curtail the consumers' ability to pay back loans. Thus, consumer loan providers will have to build additional reserves to tide over unexpected defaults and payment delays owing to the economic slowdown. This will, thereby, lead to a deterioration in industry players' asset quality.
Zacks Industry Rank Reflects Bright Picture
The Zacks Consumer Loans industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #83, which places it in the top 33% 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 an encouraging 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. Since January 2023-end, the industry's earnings estimates for 2023 have moved 5.1% north.
Before we present a few stocks that you may want to keep on your radar, 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 underperformed both the Zacks S&P 500 composite and its own sector over the past year.
The stocks in this industry have collectively lost 23.2% over this period while the Zacks S&P 500 composite and Zacks Finance sector have declined 7.5% and 13.4%, respectively.
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 0.96. The highest level of 1.55X and a median of 1.17X are recorded over the past five years.
This compares with the S&P 500's trailing 12-month P/TBV of 10.21X.
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 4.36X for the same period is way above the Zacks Consumer Loan industry's ratio.
3 Consumer Loan Stocks to Buy
Credit Acceptance: Headquartered in Southfield, MI, CACC offers financing programs and related products and services to automobile dealers across the United States, enabling them to sell vehicles to consumers irrespective of their credit history. Further, it is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by dealers on vehicles financed by the company.
Revenue growth remains a major positive for Credit Acceptance, with the same witnessing a seven-year (2016-2022) compound annual growth rate (CAGR) of 11.2%. Growth is primarily attributable to a steady rise in finance charges, which is also the main revenue component (accounting for 92% of total revenues in 2022). While finance charges are likely to witness headwinds from macroeconomic factors in the near term, the same will rebound once the operating backdrop improves. A decent rise in dealer enrolments and active dealers is also expected to support the company's top-line growth.
Credit Acceptance believes in returning capital to shareholders through stock repurchases instead of paying dividends. In September 2021, it authorized additional 2 million shares to be repurchased. As of Dec 31, 2022, the company had 0.16 million shares left to be repurchased. Despite having a substantial debt burden, its high cash flow generating business model and low capital expenditures are likely to help sustain share buybacks.
Over the past week, the Zacks Consensus Estimate for earnings has moved marginally upward for both 2023 and 2024. Shares of this Zacks Rank #2 (Buy) firm have lost 1.4% over the past six months.
SLM Corp: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. This Newark, DE-based company is focused on catering to private education loans, and providing savings and insurance products for higher education to students and families.
The expectation of modest growth in enrollment will lead to higher demand for education loans. This, along with increasing tuition costs, is likely to enhance the company's prospects. SLM remains focused on enhancing its private student loan business, maintaining a strong capital position and introducing multiple complementary products. Management projects a 5-6% increase in private education loan originations for 2023.
Further, the company is focused on expanding its operations on the back of investments in varied product offerings and inorganic activities. In 2022, Sallie Mae closed the deal with Epic Research LLC to acquire a digital marketing and education solutions company, Nitro College. The deal will bolster its digital marketing competencies, lower the cost of acquiring customer accounts and aid in becoming a holistic education solutions provider for students.
Sallie Mae has been focused on improving its NII by increasing the amount of cash and cash equivalents held in order to gain from yields on cash and other short-term investments. The rising average loan balance will support NII growth. Though the NII declined in 2020 and 2021 on lower interest income, the same witnessed a CAGR of 5.7% over the last six years (ended 2022). The company's target to grow the Private Education Loan portfolio will continue to support its NII in the quarters ahead.
Shares of this Zacks Rank #2 company have lost 16.6% over the past six months. Over the past week, the Zacks Consensus Estimate for earnings has moved 1.6% and almost 1% north for 2023 and 2024, respectively.
Navient: This Zacks Rank #2 stock is a leading provider of education loan management 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.
NAVI is growing its in-school originations. However, with the increase in overall interest rates, the extension of the federal loan payment holiday, loan forgiveness proposals and programs are anticipated to create uncertainty and limit refinance loan origination volume in the near term. Nonetheless, over the long term, demand for refinancing loans should rebound once direct federal loan repayments begins. The declining unemployment rate should further drive growth in the Private Education Refinance Loan portfolio and enhance its business prospects.
Focus on introducing new products leveraged with technology and cost control efforts will continue supporting Navient in the quarters ahead. Strengthening its asset recovery and business process outsourcing capabilities, NAVI has entered into several acquisition deals since 2015. Additionally, the company focuses on delivering operating efficiency and improving customer experience by building technology-enabled solutions.
Its shares have rallied 6% over the past six months. Over the past week, the Zacks Consensus Estimate for earnings has remained unchanged for both 2023 and 2024.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Credit Acceptance, SLM and Navient
For Immediate Release
Chicago, IL – April 11, 2023 – Today, Zacks Equity Research discusses Credit Acceptance Corp. (CACC - Free Report) , SLM Corp. (SLM - Free Report) and Navient Corp. (NAVI - Free Report) .
Industry: Consumer Loans
Link: https://www.zacks.com/commentary/2076101/3-consumer-loan-stocks-to-benefit-from-the-propering-industry
The Zacks Consumer Loans industry continues to bear the brunt of "sticky" inflation and recessionary fears. Deteriorating asset quality as economic growth slows down is a major headwind.
Yet, easing lending standards, which have increased the number of clients eligible for consumer loans and digitization of operations will keep benefiting industry players. Also, improving consumer confidence and spending rise on non-discretionary categories will result in decent loan demand. Hence, companies like Credit Acceptance Corp., SLM Corp. and Navient Corp. are worth betting on.
About the Industry
The Zacks Consumer Loans industry comprises companies 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 generate net interest income (NII), which forms the most important part of total revenues.
Prospects of the companies in this industry are highly sensitive to the nation's overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
3 Themes Shaping Consumer Loan Industry's Prospects
Improving Consumer Sentiments: The persistent inflation (though now somewhat cooling), recent bank runs, ongoing Russia-Ukraine conflict and supply-chain disruptions continue to weigh heavily on consumer sentiments. Despite this, the Conference Board Consumer Confidence Index and the Expectations Index (which shows a six-month outlook) increased in March. Ataman Ozyildirim, Senior Director, Economics at The Conference Board, said, "Driven by an uptick in expectations, consumer confidence improved somewhat in March, but remains below the average level seen in 2022 (104.5). The gain reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over."
While consumer spending on highly discretionary categories will face headwinds from inflation and higher interest rates in the coming months, spending on non-discretionary categories is expected to improve/remain stable. This will thereby result in decent demand for consumer loans. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be stable.
Easing Lending Standards: With the nation's big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet loan demand.
Credit Quality May Worsen: Since March 2020, the U.S. administration has provided substantial financial assistance to individuals through various packages to overcome pandemic-related challenges. However, with the stimulus packages gradually stopping and the Federal Reserve signaling continued monetary policy tightening to tame inflation, there is a strong likelihood that the U.S. economy might be slipping into a recession in the near term.
Also, going by the central bank's latest Summary of Economic Projections, the U.S. economy will grow 0.4% in 2023 and 1.2% in 2024, lower than the prior projection of 0.5% for this year and 1.6% for the next. These factors may severely curtail the consumers' ability to pay back loans. Thus, consumer loan providers will have to build additional reserves to tide over unexpected defaults and payment delays owing to the economic slowdown. This will, thereby, lead to a deterioration in industry players' asset quality.
Zacks Industry Rank Reflects Bright Picture
The Zacks Consumer Loans industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #83, which places it in the top 33% 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 an encouraging 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. Since January 2023-end, the industry's earnings estimates for 2023 have moved 5.1% north.
Before we present a few stocks that you may want to keep on your radar, 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 underperformed both the Zacks S&P 500 composite and its own sector over the past year.
The stocks in this industry have collectively lost 23.2% over this period while the Zacks S&P 500 composite and Zacks Finance sector have declined 7.5% and 13.4%, respectively.
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 0.96. The highest level of 1.55X and a median of 1.17X are recorded over the past five years.
This compares with the S&P 500's trailing 12-month P/TBV of 10.21X.
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 4.36X for the same period is way above the Zacks Consumer Loan industry's ratio.
3 Consumer Loan Stocks to Buy
Credit Acceptance: Headquartered in Southfield, MI, CACC offers financing programs and related products and services to automobile dealers across the United States, enabling them to sell vehicles to consumers irrespective of their credit history. Further, it is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by dealers on vehicles financed by the company.
Revenue growth remains a major positive for Credit Acceptance, with the same witnessing a seven-year (2016-2022) compound annual growth rate (CAGR) of 11.2%. Growth is primarily attributable to a steady rise in finance charges, which is also the main revenue component (accounting for 92% of total revenues in 2022). While finance charges are likely to witness headwinds from macroeconomic factors in the near term, the same will rebound once the operating backdrop improves. A decent rise in dealer enrolments and active dealers is also expected to support the company's top-line growth.
Credit Acceptance believes in returning capital to shareholders through stock repurchases instead of paying dividends. In September 2021, it authorized additional 2 million shares to be repurchased. As of Dec 31, 2022, the company had 0.16 million shares left to be repurchased. Despite having a substantial debt burden, its high cash flow generating business model and low capital expenditures are likely to help sustain share buybacks.
Over the past week, the Zacks Consensus Estimate for earnings has moved marginally upward for both 2023 and 2024. Shares of this Zacks Rank #2 (Buy) firm have lost 1.4% over the past six months.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
SLM Corp: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. This Newark, DE-based company is focused on catering to private education loans, and providing savings and insurance products for higher education to students and families.
The expectation of modest growth in enrollment will lead to higher demand for education loans. This, along with increasing tuition costs, is likely to enhance the company's prospects. SLM remains focused on enhancing its private student loan business, maintaining a strong capital position and introducing multiple complementary products. Management projects a 5-6% increase in private education loan originations for 2023.
Further, the company is focused on expanding its operations on the back of investments in varied product offerings and inorganic activities. In 2022, Sallie Mae closed the deal with Epic Research LLC to acquire a digital marketing and education solutions company, Nitro College. The deal will bolster its digital marketing competencies, lower the cost of acquiring customer accounts and aid in becoming a holistic education solutions provider for students.
Sallie Mae has been focused on improving its NII by increasing the amount of cash and cash equivalents held in order to gain from yields on cash and other short-term investments. The rising average loan balance will support NII growth. Though the NII declined in 2020 and 2021 on lower interest income, the same witnessed a CAGR of 5.7% over the last six years (ended 2022). The company's target to grow the Private Education Loan portfolio will continue to support its NII in the quarters ahead.
Shares of this Zacks Rank #2 company have lost 16.6% over the past six months. Over the past week, the Zacks Consensus Estimate for earnings has moved 1.6% and almost 1% north for 2023 and 2024, respectively.
Navient: This Zacks Rank #2 stock is a leading provider of education loan management 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.
NAVI is growing its in-school originations. However, with the increase in overall interest rates, the extension of the federal loan payment holiday, loan forgiveness proposals and programs are anticipated to create uncertainty and limit refinance loan origination volume in the near term. Nonetheless, over the long term, demand for refinancing loans should rebound once direct federal loan repayments begins. The declining unemployment rate should further drive growth in the Private Education Refinance Loan portfolio and enhance its business prospects.
Focus on introducing new products leveraged with technology and cost control efforts will continue supporting Navient in the quarters ahead. Strengthening its asset recovery and business process outsourcing capabilities, NAVI has entered into several acquisition deals since 2015. Additionally, the company focuses on delivering operating efficiency and improving customer experience by building technology-enabled solutions.
Its shares have rallied 6% over the past six months. Over the past week, the Zacks Consensus Estimate for earnings has remained unchanged for both 2023 and 2024.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.