Rising corporate and consumer spending and the growing interest in financial products are driving the growth of the financial services industry. The industry is also well-positioned to benefit from the high-interest-rate environment through improvements in profit margins.
However, not all financial services stocks are set to capitalize on the favorable trends. I think popular stock Block, Inc. (SQ) is best avoided now, given its fundamental weakness. One could instead buy Consumer Portfolio Services, Inc. (CPSS), Zuora, Inc. (ZUO), and Medallion Financial Corp. (MFIN) to benefit from the favorable industry trends.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the financial services industry is expected to perform well and why SQ is best avoided now.
Financial services include insurance, investment management, banking, and asset management services. Adopting digital financial services has completely changed how we save money, transact, avail credit, etc. Digital financial services such as digital payments, alternative lending, and on-demand money transfer have boosted the prospects of the financial services industry.
Although another potential rate hike could put other sectors under pressure, the financial industry will likely benefit from it as high-interest rates help financial companies boost their profit margins. The financial services market is expected to grow at a CAGR of 7.4% to reach $33.31 trillion by 2026. Post 2026, the market is expected to grow at a CAGR of 6.3% to reach $45.15 trillion by 2031.
SQ’s third-quarter results are due soon, with its EPS expected to increase 10.3% year-over-year to $0.46. Its revenue is expected to rise 20.3% year-over-year to $5.43 billion. However, in terms of profitability, SQ lags behind its peers.
SQ’s 34.95% trailing-12-month gross profit margin is 41.3% lower than the 59.55% industry average. Likewise, its 0.04% trailing-12-month levered FCF margin is 99.7% lower than the 14.69% industry average. Furthermore, the stock’s 0.75% trailing-12-month Capex/Sales is 62.8% lower than the industry average of 2.01%.
SQ’s Cash App registered strong growth during the pandemic thanks to the economic stimulus. Cash App’s user growth and monetization are essential for SQ’s long-term growth. However, Cash App's growth has been slowing down, with the stimulus-based growth gradually becoming insignificant and the U.S. economy returning to normalcy.
The company’s multi-billion-dollar fintech acquisition, Afterpay, which is in the Buy Now Pay Later (BNPL) segment, is facing increased competition and stricter regulations, hindering growth. Moreover, it faces tough competition in consumer financial apps and the small business market from the likes of PayPal, First Data’s Clover unit, and Shopify.
Amid geopolitical and recession risks, its foray into making hardware and chips related to Bitcoin mining could put pressure on the stock in the near term as investors are looking for safe-haven assets like gold and the U.S. dollar, and it is boosting the demand for the U.S. Treasuries. The yield on the 10-year Treasury note reached 5% for the first time in 16 years.
SQ’s stock has performed poorly, declining 43.9% over the past nine months and 20.4% over the past year to close the last trading session at $45.35.
Given these factors, investors could consider buying CPSS, ZUO, and MFIN. Let’s discuss the fundamentals of these three Financial Services (Enterprise) stock picks, starting with the third choice.
Stock #3: Consumer Portfolio Services, Inc. (CPSS)
CPSS operates as a specialty finance company. It is involved in the purchase and service of retail automobile contracts originated by franchised automobile dealers and select independent dealers in the sale of new and used automobiles, light trucks, and passenger vans.
In terms of trailing-12-month non-GAAP P/E, CPSS’ 6.79x is 14.7% lower than the 7.96x industry average. Its 0.75x trailing-12-month Price/Sales is 64.6% lower than the 2.12x industry average. Likewise, its 0.73x trailing-12-month Price/Book is 25.3% lower than the 0.97x industry average.
For the fiscal second quarter ended June 30, 2023, CPSS’ revenues rose 3.5% year-over-year to $84.86 million. Its net income came in at $13.95 million. Also, its EPS came in at $0.55.
Over the past year, the stock has gained 47.5% to close the last trading session at $8.76.
CPSS’ POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Financial Services (Enterprise) industry, it is ranked #11 out of 101 stocks. It has a B grade for Value. Click here to see the other ratings of CPSS for Growth, Momentum, Stability, Sentiment, and Quality.
Stock #2: Zuora, Inc. (ZUO)
ZUO provides a cloud-based subscription management platform that enables companies in various industries to launch, manage, and transform into a subscription business. The company offers Zuora platform, Zuora Billing, Zuora Revenue, a revenue recognition automation solution; Zuora CPQ, Zuora Collect, Zephr, and Zuora Marketplace.
On May 1, 2023, ZUO announced in its second annual Environmental, Social and Governance (ESG) Impact that it reached 100% renewable energy for ZUO’s global real estate footprint. It maintained carbon neutrality for the second year in a row, reaffirming the company’s commitment.
In terms of forward EV/Sales, ZUO’s 2.18x is 11.5% lower than the 2.46x industry average.
ZUO’s total revenue for the second quarter ended July 31, 2023, increased 9.4% year-over-year to $108.05 million. Its non-GAAP gross profit rose 15% over the prior-year quarter to $76.46 million. The company’s non-GAAP income from operations came in at $9.56 million, compared to a non-GAAP loss from operations of $151 thousand.
Also, its non-GAAP net income stood at $10.02 million, compared to a non-GAAP net loss of $4.40 million in the year-ago quarter. In addition, its non-GAAP EPS came in at $0.07, compared to a non-GAAP loss per share of $0.03 in the prior-year quarter.
Street expects ZUO’s revenue for the quarter ending October 31, 2023, to increase 7.5% year-over-year to $108.67 million. Its EPS for fiscal 2025 is expected to increase 15.5% year-over-year to $0.26. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 21.4% year-to-date to close the last trading session at $7.72.
ZUO’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It is ranked #10 in the same industry. It has a B grade for Growth and Sentiment. To see the additional ratings of ZUO for Value, Momentum, Stability, and Quality, click here.
Stock #1: Medallion Financial Corp. (MFIN)
MFIN operates as a finance company. The company operates through four segments: Recreation Lending, Home Improvement Lending, Commercial Lending, and Medallion Lending. It provides loans that finance consumer purchases of recreational vehicles, boats, and trailers; consumer home improvements; commercial businesses; and taxi medallions to individuals and small to mid-size businesses.
On June 1, 2023, MFIN announced that it had entered into a definitive agreement with CreditWorks to provide loans through Credit4Work! Financial benefit program. Medallion Bank’s President and CEO, Donald Poulton, said, “We are pleased to add CreditWorks to our strategic partnership program as we continue to expand our lending reach.”
“We believe we can help CreditWorks scale the Credit4Work! Program nationally with our proven lending platform, comprehensive compliance framework, credit risk management, and ongoing monitoring and testing,” he added.
In terms of forward non-GAAP P/E, MFIN’s 3.26x is 61.1% lower than the 8.38x industry average. Its 0.79x forward Price/Sales is 62.4% lower than the 2.09x industry average. Likewise, its 0.46x forward Price/Book is 51.3% lower than the 0.95x industry average.
MFIN’s net interest income for the second quarter ended June 30, 2023, increased 17.4% year-over-year to $46.95 million. Its total interest income rose 29.8% over the prior-year quarter to $58.29 million. Its net income increased 8.2% year-over-year to $19.33 million.
Analysts expect MFIN’s EPS and revenue for the quarter ended September 30, 2023, to increase 41.7% and 15.1% year-over-year to $0.45 and $48.37 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 0.5% to close the last trading session at $6.55.
MFIN’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It is ranked #3 in the Financial Services (Enterprise) industry. It has a B grade for Value. Click here to see the other ratings of MFIN for Growth, Momentum, Stability, Sentiment, and Quality.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
ZUO shares were unchanged in premarket trading Wednesday. Year-to-date, ZUO has gained 21.38%, versus a 11.78% 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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