Despite uncertainties posed by challenging macroeconomic conditions over the past year, the financial services industry is anticipated to prosper, largely attributed to the emergence of fintech companies that have disrupted traditional financial services models.
Given the backdrop, as we head into December, this article evaluates the fundamentals of three financial service companies — Digital World Acquisition Corp. (DWAC), FLEETCOR Technologies, Inc. (FLT), and Manhattan Bridge Capital, Inc. (LOAN) — to determine their prospects.
Based on the factors discussed while assessing the stocks, I believe LOAN could be a solid investment now. However, while FLT is worth watching for better entry points, I find DWAC best avoided now.
In the post-pandemic era, there has been a surge in the demand for online financial services. The widespread use of the internet and mobile technologies has led to increased connectivity, making financial services more readily available to a broader audience.
Moreover, consumers now expect seamless and convenient financial services experiences. This expectation shift prompts financial institutions to invest in user-friendly interfaces, personalized services, and quicker transaction processing.
Financial institutions leverage technology to offer innovative solutions such as robo-advisors and mobile payment platforms. The financial service application market is expected to hit $240.21 billion by 2028, growing at an impressive CAGR of 13.1%.
On the other hand, despite the October Consumer Price Index (CPI) report showing a slowing down of headline inflation to an annual rate of 3.2%, mainly due to a decline in energy prices, it is still above the Fed’s 2% threshold. Additionally, The Fed’s benchmark funds rate, determining short-term borrowing costs, is presently targeted within a range of 5.25% to 5.5%, marking the highest level in 22 years.
While financial institutions may see advantages in the prevailing high-interest rate environment, maintaining elevated interest rates for an extended period poses risks. Prolonged high borrowing costs could lead to challenges for individuals and businesses in repaying loans, especially in the face of job losses.
Nevertheless, the financial services sector has historically driven progress during economic and societal transformations. In 2024, the industry is expected to undergo technological upheavals, including generative AI, cloud migration, and the convergence of industry boundaries with trends like embedded finance.
In light of such industry trends, let us dig deeper into the three Financial Services (Enterprise) stocks, beginning with the third from the investment point of view.
Stock #3: Digital World Acquisition Corp. (DWAC)
DWAC is a special purpose acquisition company (SPAC) that focuses on effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or related business combination with one or more businesses. The company intends to identify tech-focused companies in the SaaS, technology, or fintech and financial services sector.
On August 25, DWAC confirmed the receipt of an anticipated letter from The Nasdaq Stock Market LLC's Listing Qualifications Department. The letter notified the company of its non-compliance with Nasdaq Listing Rule 5250(c)(1) as it had not submitted its quarterly report on Form 10-Q for the period ending June 30, 2023.
The rule mandates the timely filing of all required periodic financial reports with the SEC. This follows a prior notice from Nasdaq on May 23, 2023, regarding the company's failure to file its fiscal first quarter 10-Q for the quarter ending March 31, 2023.
For the third quarter, which ended on September 30, 2023, DWAC’s formation and operating costs increased 103.7% year-over-year to $4.31 million. The company’s net loss widened 219.3% from the year-ago value to $12.19 million, while its net loss per Class A common share worsened 230% from the prior-year quarter to $0.33.
In addition, during the same period, its total current liabilities stood at $53.76 million, increasing 129.1%, compared to $23.46 million as of December 31, 2022.
DWAC’s shares have gained marginally intraday to close the last trading session at $18.14.
DWAC’s grim fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an F grade for Value and a D for Growth and Sentiment. In the 101-stock Financial Services (Enterprise) industry, DWAC is ranked #93. Click here to see DWAC’s ratings for Momentum, Stability, and Quality.
Stock #2: FLEETCOR Technologies, Inc. (FLT)
FLT is a business payments company that helps businesses spend less by enabling them to manage their expense-related purchasing and vendor payment processes. The company’s service portfolio includes corporate payment solutions, Virtual Cards, purchasing cards, travel and entertainment cards, and more.
On November 6, FLT confirmed its acquisition of PayByPhone, a worldwide provider of digital solutions for parking payments. This strategic move broadens FLT’s array of vehicle payment solutions, catering to the needs of both its fleet clients and individual consumers.
For the fiscal third quarter, which ended on September 30, 2023, FLT’s revenue increased 8.7% year-over-year to $970.89 million, while its net income and EPS came in at $271.49 million and $3.64, up 9.1% and 10.6%, respectively.
However, during the same period, the company’s cash and cash equivalents amounted to $1.09 billion, declining 23.8% compared to $1.44 billion as of December 31, 2022.
Street expects FLT’s revenue and EPS for the fiscal fourth quarter (ending December 2023) to increase 9.8% and 10.9% year-over-year to $969.79 million and $4.48, respectively. Moreover, the company surpassed the revenue and EPS estimates in three of the trailing four quarters.
Additionally, over the past three years, FLT’s revenue and net income have improved at CAGRs of 14.5% and 9.2%, respectively. In contrast, its Levered FCF declined at a CAGR of 7.6% over the same period.
FLT’s shares have plunged 11.4% over the past three months but surged 28% year-to-date to close the last trading session at $235.12.
FLT’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.
It is ranked #21 out of 101 stocks in the same industry. It has a C grade for Growth, Momentum, Stability, and Sentiment. Click here to see FLT’s ratings for Value and Quality.
Stock #1: Manhattan Bridge Capital, Inc. (LOAN)
LOAN is a real estate finance company that originates, services, and manages a portfolio of first mortgage loans in the United States. The company offers short-term, secured, and non-banking loans to real estate investors to fund their residential or commercial property acquisition, renovation, rehabilitation, or development.
On November 28, LOAN declared a quarterly dividend of $0.11 per share, payable to its shareholders on January 16, 2024.
The company’s annual dividend of $0.45 translates to a 10.07% yield on the prevailing prices, while its four-year average dividend yield is 8.93%. Its dividend payouts have grown at a CAGR of 2.5% over the past three years.
In the fiscal third quarter, which ended on September 30, 2023, LOAN’s total revenue increased 15.5% year-over-year to $2.43 million, while the company’s net income and net income per share amounted to $1.45 million and $0.13, representing increases of 16.9% and 18.2% from the prior-year quarter, respectively.
Analysts expect LOAN’s EPS for the fourth quarter (ending December 2023) to increase 20% year-over-year to $0.12. Meanwhile, its consensus EPS estimate of $0.48 for the fiscal period ending December 2023 reflects a 6.7% year-over-year improvement.
Moreover, the company surpassed its EPS estimates in three of the trailing four quarters, which is promising.
LOAN’s revenue increased at CAGRs of 7.3% and 6% over the past three and five years, respectively. In addition, the company’s net income and total assets have grown at CAGRs of 6.5% and 7.2% over the past three years, respectively.
The stock has soared marginally intraday to close the last trading session at $4.51.
Unsurprisingly, LOAN has an overall rating of A, equating to a Strong Buy in our proprietary rating system. It has a B grade for Stability, Sentiment, and Quality. Out of 101 stocks in the Financial Services (Enterprise) industry, LOAN is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have LOAN’s ratings for Growth, Value, and Momentum. Get all LOAN ratings here.
What To Do Next?
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FLT shares were trading at $239.09 per share on Wednesday morning, up $3.97 (+1.69%). Year-to-date, FLT has gained 30.17%, versus a 21.04% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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