The Zacks Consumer Loans industry continues to bear the brunt of high inflation and expectations of economic slowdown. This will dampen the demand for consumer loans and hamper industry players’ top-line growth. Deteriorating asset quality is a major near-term headwind too.
However, easing lending standards, which have increased the number of clients eligible for consumer loans, stabilizing consumer sentiments and the digitization of operations will keep aiding consumer loan providers. Hence, industry players like Mr. Cooper Group Inc. COOP, World Acceptance Corporation WRLD and EZCORP, Inc. EZPW are worth investing in right now.
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 the Future of the Consumer Loan Industry
Asset Quality Weakening: For the major part of 2020, consumer loan providers built additional provisions to tide over unexpected defaults and payment delays due to the economic downturn resulting from the COVID-19 mayhem. This considerably hurt their financials. However, with solid economic growth and support from government stimulus packages, industry players began to release these reserves back into the income statement.
Now again, the current macroeconomic headwinds, including expectations of economic downturn, will likely curtail consumers’ ability to repay loans. Thus, consumer loan providers are building additional reserves to counter any fallout from unexpected defaults and payment delays. This is leading to a deterioration in industry players’ asset quality, and several credit quality metrics have crept up toward pre-pandemic levels.
Consumer Sentiments Stabilizing: The persistently high inflation (though cooling now) and other macroeconomic headwinds continue to weigh on consumer sentiments. Though the Conference Board Consumer Confidence and the Expectations Indexes improved in January, consumers remained concerned about “rising prices although inflation expectations fell to a three-year low.” So, this will result in muted demand for consumer loans in the near term. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to decline.
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 is helping consumer loan providers meet loan demand.
Zacks Industry Rank Reflects Gloomy 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 #192, which places it in the bottom 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 underperformance 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 bottom 50% of the Zacks-ranked industries is a result of a disappointing 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 2024 have moved 8.6% lower.
Before we present a couple of stocks that you may want to bet on, 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 sector over the past two years.
The stocks in this industry have collectively lost 7.2% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 15.2% and 5.5%, respectively.
Two-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing consumer loan stocks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.33X, above the median level of 1.14X, over the past five years. This compares with the highest level of 1.56X and the lowest level of 0.48X over this period. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 11.57X and the median level is 10.17X.
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. However, 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 4.87X 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 Stocks Worth Considering
Cooper Group: Headquartered in Coppell, TX, the company is engaged in non-banking services for mortgage loans. The company operates through its primary brands — Mr. Cooper and Xome.
Though the demand for mortgages is subdued now due to higher rates, COOP is well-placed to leverage its scale (it is one of the largest non-bank mortgage servicers in the United States) and bolster its top-line growth. Further, the strategic acquisitions of Home Point Capital Inc. and Roosevelt Management Company, LLC in 2023 will boost the company’s servicing business.
With the Federal Reserve likely to keep interest rates high in the near term to control inflation, this Zacks Rank #2 (Buy) company’s NII and NIM are expected to witness improvements, though rising funding costs will weigh on both.
The Zacks Consensus Estimate for earnings for 2024 and 2025 has moved 2% and 4.8% upward, respectively, over the past 30 days. Also, COOP shares have jumped 28.7% over the past six months.
Price and Consensus: COOP
World Acceptance: This Zacks Rank #1 (Strong Buy) company operates a small-loan consumer finance (installment loan) business. This Greenville, SC-based company operates through 1,052 branches in more than 15 states. You can see the complete list of today’s Zacks #1 Rank stocks here.
WRLD majorly generates revenues from interest and fee income on its pre-computed and interest-bearing consumer installment loans. Driven by steady demand for consumer loans, the metric is expected to keep improving in the quarters ahead.
Also, World Acceptance has a share repurchase plan in place. In November 2023, the company expanded its share buyback plan to $20 million. As of Dec 31, 2023, approximately $2.8 million worth of authorization was remaining. Given the decent liquidity position, share repurchases seem sustainable.
Over the past 30 days, World Acceptance shares have lost 8.5%. The Zacks Consensus Estimate for earnings for fiscal 2024 and fiscal 2025 have moved 12.2% and 10.6% upward, respectively, over the past 30 days.
Price and Consensus: WRLD
EZCORP: This Zacks Rank #1 stock provides pawn services in the United States and Latin America. Based in Austin, TX, the company is a leading provider of pawn transactions and seller of pre-owned and recycled merchandise.
EZPW remains focused on optimizing its balance of pawn loans outstanding, which results in higher pawn service charges (PSC). Driven by this, the company’s PSC has been improving, with almost 37% of revenues coming from there. As of Dec 31, 2023, EZCORP had more than 1,235 stores across its footprint. As part of its strategy, the company intends to further expand through both acquisitions and de novo openings.
Further, the company has a share repurchase plan in place. As of Dec 31, 2023, almost $33 million worth of authorization remained available. Given the decent liquidity position, share repurchases seem sustainable.
EZCORP shares have rallied 21.3% over the past six months. Over the past 30 days, the Zacks Consensus Estimate for earnings has been revised 12.9% and 7.8% north for fiscal 2024 and fiscal 2025, respectively.
Price and Consensus: EZPW
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