MIAMI, FL / ACCESSWIRE / November 18, 2015 / The best time to borrow is when interest rates are low, but for credit providers, the best time to lend money is when interest rates are high. The US Federal reserve is highly expected to raise interest rates in the near future and this will not only work out well for bond investors, but also for companies that are in the business of lending money to others.
Credit service providers are about to receive a major boost on top line and this could trigger a potential rally in stock prices of publicly-traded companies. The interest rate hike is expected to be gradual which means that the initial impact on top line may not be much for large companies.
However, for the small players, the change may be significant enough to trigger the attention of small cap investors and these are the stocks that may be at the top of the list when they begin to evaluate available opportunities.
Wins Finance Holdings (NASDAQ:WINS) is one of the hottest micro-cap stocks now following its merger with Sino Mercury Acquisition Corp. (NASDAQ:SMAC), (NASDAQ:SMACU) early this month. The acquisition was first announced in August, but completed early this month. WINS is a financial services company which provides financing solutions to small and medium enterprises in China. Its services are focused on areas of financial leasing, guarantee, advisory, and consulting.
The company stock price has been rather volatile over the recent past, which was highly expected following the announcement of the merger, but now investors appear to be settling on an upward movement sentiment as the shares look to recover following last week's plunge.
WINS fiscal June 30th 2015 year end numbers are as follows:
- Net Revenue + Interest on Investments - $31.5 million
- Net Income - $26.1 million
- Net assets - $237.3 mllion
- Pro Forma Outstanding Shares (basic and diluted) - 21,526,756
- Pro Forma EPS (earnings per share) - $1.21
- Pro Forma BPS (book value per share) $11.02
Nonetheless, the stock still appears way off the mark the recent levels of about $10 per share as it continues to trade below the $9.00 mark.
For many years, WINS served as the bridge between banks and SME customers. This role enabled it to establish long term relationships with customers thereby building a pool of loyal clientele. As the company looks to match on towards providing SME lending services, it will not come against the obstacle of having to build relationships with customers from scratch.
More than 80% of Chinese SMEs are not able to obtain bank loans directly, WINS acts as a guarantor to such customers seeking credit facilities to boost their business operations.
The company does the work on the ground to vet various customers looking for loan from banks and then facilitates the issuance of the same by connecting the two parties. The high rate of SMEs unable to gain access to credit facilities directly from banks suggests that WINS has a huge potential in terms of growth as the addressable market continues to grow with the increasing growth of Startup enterprises in the country.
Enova International (NYSE:ENVA) is one of the stocks that may be considered by investors looking to invest in SME-Focused lenders. This company trades at very attractive valuation multiples with a P/E ratio of about 4.2x compared to industry average of about 13x. Its P/S ratio of 0.43x compared to industry average of 3.57x also makes the stock look significantly cheap when compared to peers.
The company's forward P/E of about 3.8x suggests that there will be an improvement in earnings within the next twelve months, and this could boost the stock price further returning it to the current, or higher P/E multiple.
The company's revenue and income has been declining over the last few years. However, in the most recent quarter ended September 30, 2015, the company posted 6% increase in US revenue to $133.7 million while U.S. installment loan and receivables purchase agreement revenue rose 40% year over year to $53.6 million. On the other hand, U.K loan originations rose 23% sequentially.
Based on the current run-rate, the company looks set to reach $600 million in annual revenue for the current year, which is more or less the figure for the trailing 12-month period. Again this suggests little to no growth, but given the expected interest rate hike, things could change in 2016. The company sees US-based revenue as a major catalyst towards incremental growth in the coming quarters.
"We are pleased by the continued traction of our U.S. installment products, particularly the success of our NetCredit near-prime offering. Our installment loan products continue to represent an increasing portion of our revenue mix, accounting for 40% of total revenue in the third quarter, up from 30% of total revenue for the same quarter last year. Moreover, during the third quarter the business originated the largest number of loans to new customers since the fourth quarter of 2013," said Robert Clifton, CFO of Enova during a recent earnings call.
Regional Management Corp. (NSYE:RM), is another option especially for investors looking to invest in companies operating in specialty consumer finance services. The company provides various loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders.
Regional Management has experienced a gradual rise in revenues over the last few years, but net income only began to recover this year after plunging in 2014.
The company has also managed to grow its Free Cash Flow float over the last few years, and now boasts a balance of more than $78 million. The company also has impressive operating cash flow of about $82 million to match up its current debt of$379 million.
The company currently makes a revenue of about $200 million and a net income of roughly $20 million a trailing 12-month period. The most recent quarter results returned $6.5 million in earnings, which was a massive increase from $3.38 million the same period last year, but revenues were more or less same increasing by just $2 million to $55 million from $53 million reported last year.
This is despite it being a credit service provider, which implies that a majority of its borrowed money is often borrowed by SMEs and individuals at a higher interest rate. This means that it is not effectively a company debt, unless there are defaulters.
Shares of Regional Management are currently trading at 10.28x in price to earnings ratio, which compares to the industry average of about 13x, while its P/S ratio also compares impressively at 0.98x versus 3.57x.
The company 5-year expected growth in earnings also makes it look cheaper than rivals with a PEG ratio of 0.38x compared to industry average of 1.12. As such, this stock provides an interesting opportunity for investors looking to invest long term.
Consumer Portfolio Services (NASDAQ:CPSS) is a credit services provider based in Irvine California which currently has a market value of about $131 million. This stock has been on the decline over the last few quarters albeit with a series of unsuccessful rebounds, which have seen it fall to $5.00 per share from a price of about $7.40 in about 7 months.
The stock hit a multi-year high of about $12.00 share in 2013, but has completely failed to emulate those highs with the closest level to that being about $9.20 achieved at the start of 2014.
From a fundamental perspective, the company's revenue and net income have increased significantly over the last three years and this can be a source of optimism for investors as the company continues to turn around things.
Consumer Portfolio Services has also seen a significant increase in cash from operations since 2012, and this adds to the positive sentiment amongst investors.
From a valuation perspective, shares of Consumer Portfolio Services currently trade at a P/E ratio of about 4.84x compared to industry average of about 13x. This suggests an undervaluation. This fact is also backed by the company's P/E ratio, which currently stands at about 0.84x versus the industry average of about 3.57x.
The company's PEG ratio (5-year expected) of 0.25x is also miles better than the industry average of 1.12x, again stressing the manner in which the stock appears undervalued in the eyes of a value investor analyzing it based on these valuation metrics.
In the most recent quarter, the company posted 22% increase in revenues to $94 million while diluted earnings increased by 16.7% to $0.28 per share compared to $0.24 per share reported the same period last year.
The company also reported $288 million worth of new contract purchases while its current portfolio increased to $1.94 billion from $1.82 billion on a sequential basis. The company also acquired a second triple-A rating on third quarter asset-backed securitization.
The performance in the most recent quarter highlights solid financial position for the company, while both top line and bottom line continue to improve. Therefore, this stock offers one of the best opportunities for investors looking to capture it before it embarks on a major rally. The recent plunge makes it even a better buy than it was a couple of quarters ago.
Conclusion
The bottom line is that specialized consumer finance services are a major industry which currently continues to thrive under the radar as media focuses on the heavy weights in the financial services industry.
The stocks discussed in this write-up are a good example of how value can remain hidden unless investors take it upon themselves to identify these value plays that tend to fly unnoticed.
Nonetheless, it is always important to look at risks associated with investing in each stock especially in terms of liquidity so that if things appear different from what you expected, you can always cash out without trouble.
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