Top 3 Stocks in the Thriving Consumer Lending Industry to Buy – June 14, 2021

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Sachs Consumer loans industry bears the brunt of low interest rates. As the economy reopens and picks up steam, muted consumer sentiment due to inflation concerns is likely to reduce demand for consumer loans in the near future.

However, the easing of lending standards, which has increased the number of customers eligible for consumer loans, and stimulus packages, are likely to continue to provide much-needed support to these companies. In addition, digitalizing operations will improve operational efficiency. Industry players including Discover financial services (DFS Free report), Credit Acceptance Corporation (CACC Free report) as well as Navient Corporation (NAVI Free report) will benefit from these auspicious events.

About the industry

The Zacks consumer loan industry includes firms that provide mortgages, refinancing, home equity lines of credit, credit cards, car loans, student loans, and individual loans, among others. The outlook for companies in this industry is very sensitive to the overall economic health of the country. In addition to offering the aforementioned products and services that help generate net interest income, which is an important part of total revenue, several consumer loan providers are also involved in activities such as commercial lending, insurance, loan servicing and asset recovery. They support companies in generating commission income. It also helps companies diversify their revenue streams and become less dependent on the vagaries of the economy.

3 key trends shaping the future of the consumer lending industry

Asset quality is enhanced by incentive packages: Since last March, the US administration has provided financial assistance to individuals in the form of tax breaks and withholdings, mortgage waiver and additional unemployment benefits, among other things, through various incentive packages. With their support, as well as large-scale vaccinations, economic growth in the second half of 2021 is expected to have a steady dynamic. Thus, it is expected that this will help providers of consumer loans not to witness a significant increase in delinquency rates.

Easing lending standards offer support to: After major national credit reporting agencies removed all tax liens from consumer credit reports since 2018, the credit ratings of several consumers have improved. This increased the number of consumers for the industry. In addition, the easing of credit standards is helping consumer credit providers to meet the increased demand for credit.

Low rates and weak consumer sentiment affect productivity: The Federal Reserve cut interest rates to near zero in March 2020 in an effort to bolster the U.S. economy from the coronavirus-induced downturn. At the April FOMC meeting, the central bank did not announce a rate change anytime soon. In addition, weak consumer sentiment due to the expected rise in inflation is likely to affect the demand for loans to some extent. Thus, it is expected that in the near term, growth in net interest margin and net interest income for consumer lending companies will be difficult.

Industry Zacks Ranking Reflects Good Outlook

The Zacks Consumer Credit Industry is a 19-share group of the broader Zacks group. Finance sector. The industry is currently ranked 35th on the Zacks rankings, placing it in the top 14% of the Zacks’ over 250 industries.

Group Industry Zacks Ranking, which is basically the average of the Zacks rating for all member stocks, indicates superiority in the short term. Our research shows that the top 50% of industries ranked by the Zacks outperform the bottom 50% by more than 2x.

The industry’s positioning in the top 50% of the Zacks rankings is the result of encouraging earnings forecasts for the participating companies as a whole. Looking at the revised estimates of total profit, it seems that analysts are increasingly confident in the revenue growth potential of this group. Since the end of December 2020, the industry’s revenue estimate for 2021 has grown by 78.8%.

Before we present a few stocks that you might want to consider for your portfolio, let’s take a look at recent stock market performance and the valuation picture.

Industry versus wider market

The Zacks consumer credit industry has outpaced both the composite Zacks S&P 500 and its own sector over the past year.

Stocks in this industry collectively jumped 105.6% over the period, while the Zacks S&P 500 Composite and Zacks Finance sectors rose 40.6% and 45.8%, respectively.

Annual price

Current industry assessment

Based on the price / material value (P / TBV) book, which is commonly used to value providers of consumer loans due to large fluctuations in their results from one quarter to the next, the industry is currently trading at 1.42X. The highest levels of 1.50X and a median of 1.20X have been recorded over the past five years.

In comparison, the 12-month moving P / TBV for the S&P 500 is 17.78X, as shown in the chart below.

Value to Material Book (TTM)

Because financial stocks generally have a lower P / TBV ratio, comparing consumer loan providers to the S&P 500 may not make sense for many investors. But comparing the group’s P / TBV to that of the broader sector ensures that the group is trading at a decent discount. As shown in the chart below, Zacks Finance’s rolling 12-month P / TBV ratio of 4.58X over the same period is well above the Zacks consumer loans sector.

Value to Material Book (TTM)

3 consumer loan providers to bet on

Discover financial opportunities: Zacks Rank # 1 Stock (Strong Buy) is a direct banking and payment services company. The company, headquartered in Riverwoods, Illinois, offers credit cards, personal, student and home loans, and deposit products.

You can see See the full list of today’s Zacks # 1 Rank stocks here

Strong room for credit card growth and a rebound in sales are expected to help the company’s financial performance given the robust economic recovery and improved consumer spending. In addition, Discover Financial’s revenue is expected to improve on its strong market position, expanding global payments business and attractive core business.

In addition, the company took certain cost control initiatives last year in response to the coronavirus pandemic. Based on sound cost management efforts, Discover Financial expects spending (excluding marketing costs) to remain relatively unchanged in 2021.

In addition, Discover Financial boasts a solid balance sheet that is likely to support its capital allocation plans. After suspending share buybacks in early 2020, the company resumed it in January. The Board of Directors approved a $ 1.1 billion share buyback plan. The company also pays out quarterly dividends on a regular basis. Specifically, management plans to accelerate buybacks in the second quarter of 2021 and improve returns on equity in the second half of the year.

Its shares are up 44.3% in the past six months. The company’s profits are expected to grow by 272.5% in 2021.

Price and Consensus: DFS

Credit Acceptance Corporation: The company, headquartered in Southfield, Michigan, offers financing programs and ancillary products and services to auto dealers in the United States, allowing them to sell vehicles to consumers regardless of their credit history. In addition, it reinsures vehicles under car service contracts that dealers sell to consumers on vehicles funded by the company.

As the economy reopens and picks up steam, the company’s financial spending is likely to continue to improve on the back of increased demand for auto loans. In addition, decent growth in the number of dealers and active dealers is expected to support revenue growth.

The company’s profits are expected to grow 67.9% in 2021. However, this company’s Zacks Rank # 2 (Buy) has gained 26% in the past six months.

Price and Consensus: CACC

Navient Corporation: This Zacks Rank # 1 company is a leading provider of education loan and business process solutions. Headquartered in Wilmington, Delaware, the company is one of the US Department of Education’s leading providers of direct student loans.

A focus on new product introductions powered by technology, cost control efforts and an inorganic expansion strategy will continue to support Navient in the coming quarters. In addition, the economic recovery and lower unemployment rates are likely to further improve her business prospects.

Its shares have jumped 104.6% in the past six months. The company’s profits are expected to grow 29.9% this year.

Price and Consensus: NAVI

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