In a rising interest rate environment, most sectors usually struggle with a high cost of capital. However, the financial sector typically thrives in a rising interest rate environment because its revenues correlate positively to interest rates.
With the Federal Reserve unlikely to cut rates anytime soon, financial companies could continue to perform well. Therefore, it could be wise to buy fundamentally strong financial stocks OneMain Holdings, Inc. (OMF), World Acceptance Corporation (WRLD), and EZCORP, Inc. (EZPW).
Before diving deeper into the fundamentals of these stocks, let’s discuss what could drive the financial sector’s performance.
The Fed announced its tenth interest rate hike last week by 0.25 percentage points, taking the federal funds rate to a target range of 5% to 5.25%, the highest since August 2007.
The central bank hinted that a pause in the hiking cycle is possible if inflation continues to ease. April’s consumer price index (CPI) increased 0.4% for the month, in line with estimates, and rose 4.9% annually, slightly lesser than the 5% estimate. Although inflation remains above the Fed’s 2% target, the central bank could consider pausing rate hikes primarily because of the uncertainty related to the banking system.
Consumer financial services companies offer financial products and services to individuals, households, and small businesses. Revenues of these companies get a boost in a high-interest rate environment as borrowers need to pay more on their debt. Higher interest rates help widen the spread for consumer financial companies.
Furthermore, their credit quality improves as borrowers with good credit scores and stable incomes become eligible to borrow at higher rates.
Let’s take a closer look at the fundamentals of the featured stocks.
OneMain Holdings, Inc. (OMF)
OMF is a financial service holding company that is engaged in the consumer finance and insurance business. The company originates, underwrites, and services personal loans secured by automobiles, other titled collateral, or unsecured. The company offers credit cards and insurance products comprising life, disability, involuntary unemployment, and optional non-credit insurance.
In terms of forward non-GAAP P/E, OMF’s 5.75x is 28.6% lower than the 8.05x industry average. Its 1.01x forward Price/Sales is 46.8% lower than the 1.89x industry average. Likewise, its 0.57x forward non-GAAP PEG is 42.8% lower than the 1.01x industry average.
On May 2, 2023, OMF announced that it had chosen FinMkt, to expand in the competitive home improvement point-of-sale financing market with loans originated by WebBank. OMF’s Chief Strategy Officer Jenny Osterhout said, “As we advance our mission to improve the well-being of hardworking Americans, we are excited to partner with FinMkt’s impressive technology platform to help us serve more customers.”
OMF’s interest income for the first quarter ended March 31, 2023, increased 0.5% year-over-year to $1.09 billion. Its total other revenues rose 9.3% year-over-year to $177 million. The company’s adjusted net income came in at $177 million. Also, its adjusted EPS came in at $1.46.
Analysts expect OMF’s revenue for the quarter ending June 30, 2023, to increase 1.4% year-over-year to $1.05 billion. Its EPS for the quarter ending September 30, 2023, is expected to increase 8% year-over-year to $1.63. The stock has gained 6.5% year-to-date to close the last trading session at $35.46.
OMF’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #5 out of 49 stocks in the Consumer Financial Services industry. It has a B grade for Growth and Quality. Click here to see the additional ratings of OMF for Value, Momentum, Stability, and Sentiment.
World Acceptance Corporation (WRLD)
WRLD engages in the small-loan consumer finance business. The company offers short-term small installment loans, medium-term larger installment loans, related credit insurance, and ancillary products and services to individuals. It also provides automobile club memberships to its borrowers and income tax return preparation and electronic filing services.
In terms of forward EV/EBIT, WRLD’s 10.43x is 3.3% lower than the 10.78x industry average. Its 1.03x forward Price/Sales is 45.3% lower than the 1.89x industry average.
For the fiscal year ended March 31, 2023, WRLD’s total revenues increased 5.4% year-over-year to $616.55 million. Its interest and fee income rose 4.7% year-over-year to $508.34 million. The company’s net income came in at $21.23 million. Also, its EPS came in at $3.60.
For the quarter ending June 30, 2023, WRLD’s EPS is expected to increase 141.2% year-over-year to $0.63. Its revenue for fiscal 2025 is expected to increase 9.8% year-over-year to $641.60 million. The stock has gained 57.8% year-to-date to close the last trading session at $104.05.
WRLD’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
It is ranked #6 in the same industry. It has an A grade for Quality and a B for Value. To see the other ratings of WRLD for Growth, Momentum, Stability, and Sentiment, click here.
EZCORP, Inc. (EZPW)
EZPW provides pawn services. The company operates through three segments: U.S. Pawn, Latin America Pawn, and Other Investments. It offers pawn loans collateralized by tangible personal property, jewelry, consumer electronics, tools, sporting goods, and musical instruments. The company also sells merchandise, primarily collateral forfeited from pawn lending operations and pre-owned merchandise purchased from customers.
In terms of forward EV/EBITDA, EZPW’s 6.56x is 33.9% lower than the 9.93x industry average. Its 0.83x forward EV/Sales is 57.2% lower than the 1.95x industry average. Likewise, its 0.30x forward non-GAAP PEG is 70.5% lower than the 1.01x industry average.
EZPW’s total revenues for the second quarter ended March 31, 2023, increased 19.7% year-over-year to $258.42 million. Its gross profit rose 15.7% over the prior-year quarter to $149.18 million.
The company’s operating income increased 10.4% year-over-year to $26.73 million. Its adjusted net income increased 1.8% year-over-year to $17 million. Also, its adjusted EPS came in at $0.23, representing an increase of 4.5% year-over-year.
Analysts expect EZPW’s revenue for the quarter ending June 30, 2023, to increase 13.2% year-over-year to $244.33 million. Its EPS for the quarter ending September 30, 2023, to increase 30% year-over-year to $0.20. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 28% to close the last trading session at $8.87.
EZPW’s POWR Ratings reflect solid prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #2 in the Consumer Financial Services industry. It has a B grade for Value. Click here to see the additional ratings of EZPW for Growth, Momentum, Stability, Sentiment, and Quality.
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OMF shares were unchanged in premarket trading Friday. Year-to-date, OMF has gained 11.90%, versus a 8.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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