Can You Bank On These Three Consumer Lending Stocks?

In this article I use AAII’s A+ Investor Stock Grades to provide insight into three consumer lending stocks. With rising consumer confidence, the potential for interest rate cuts and a stable labor market, should you consider the three stocks of Enova International (ENVA), Qifu Technology (QFIN) and Regional Management (RM)?

Consumer Lending Stocks Recent News

U.S. consumer confidence has reached a six-month high, with the Conference Board’s Consumer Confidence index climbing from 101.9 in July to 103.3 in August. This indicates growing optimism about the economic outlook. A recent report from the Federal Reserve Bank of New York shows that consumers’ median inflation expectations for three years ahead fell 0.6 percentage points to 2.3%, as of July 2024. Meanwhile, the U.S. labor market remains stable, as indicated by a slight decrease in the number of Americans filing for unemployment benefits for the week of August 24.

Consumer lending companies stand to benefit from these economic conditions. Individuals are likely to feel more secure about their financial situations and more comfortable about taking on new debt. This, in turn, can drive higher loan origination volumes, boosting revenues for consumer lenders. In addition, as inflation expectations ease, consumers may have more disposable income, making them more likely to finance large discretionary purchases. If the Federal Reserve cuts interest rates, it will lower borrowing costs for consumers, making loans more affordable and accessible. This can lead to an increase in demand for various types of consumer loans, such as personal loans, auto loans and credit cards.

Given these economic conditions, consumer lending companies have the potential to benefit. For investors looking to capitalize on these dynamics, should Enova International, Qifu Technology and Regional Management be considered?

Grading Consumer Lending Stocks

When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.

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Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three consumer lending stocks—Enova International, Qifu Technology and Regional Management—based on their fundamentals.

AAII’s A+ Stock Grade Summary for Three Consumer Lending Stocks

What the A+ Stock Grades Reveal

Enova International (ENVA) is a technology and analytics company that provides online financial services, including loans and lines of credit, to consumers and small businesses in 37 states across the U.S. and Brazil. Enova International also extends financing to small businesses in 49 states and Washington, D.C. The company’s clientele comprises small businesses with bank accounts that use alternative financial services due to limited access to traditional credit from banks, credit card companies and other lenders. Enova International’s product offerings include consumer and small business installment loans, lines of credit, credit services organization programs and bank programs. Its financing products are marketed under the brands CashNetUSA, NetCredit, OnDeck Capital, Headway Capital and Pangea USA LLC.

Enova International has a Momentum Grade of A, based on its Momentum Score of 92. This means that the stock’s momentum has been very strong in terms of its weighted relative price strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 94, 45, 91 and 30, respectively from the most recent quarter. The weighted four-quarter relative price strength is 14.1%.

A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 through 2019.

The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.

Enova International has a Quality Grade of A, based on a score of 85, which is very strong. The company ranks strongly in terms of its buyback yield and Z-Score, which measures bankruptcy risk. Its buyback yield of 13.3% ranks in the 96th percentile among all U.S.-listed stocks, and its Z-Score of 10.79 ranks in the 91st percentile. Enova International also has a return on assets of 3.9%, which is above the sector median of 0.9% and ranks in the 72nd percentile.

The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. The company’s Growth Grade is B, which is strong. Enova International has generated positive annual cash from operations in the past five consecutive years and has a five-year annualized sales growth rate of 4.8%.

Qifu Technology (QFIN) is a China-based company specializing in credit technology services. The company’s services are categorized into credit-driven services and platform services based on the nature of the service and the associated credit risk. The credit-driven services involve matching potential borrowers with financial institutions, allowing these institutions to acquire borrowers, conduct credit evaluations, facilitate fund matching and provide post-loan services. The platform services, offered under a capital-light model, include comprehensive loan assistance, post-loan services, intelligent marketing services, referral services and risk management software as a service for financial institution partners through the Intelligent Credit Engine model.

The company has a Value Grade of A, based on its Value Score of 96, which is deep value. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda).

The company has a price-to-free-cash-flow ratio of 3.9, ranking in the seventh percentile among all U.S.-listed stocks. Its price-earnings ratio is 6.1 and its enterprise-value-to-EBITDA ratio is 2.7, ranking in the eight and sixth percentiles, respectively. Its shareholder yield is 10.6%, ranking in the sixth percentile.

Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Qifu Technology has an Earnings Estimate Revisions Grade of A, based on a score of 88, which is very positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.

Qifu Technology reported a positive earnings surprise of 27.8% for the second quarter of 2024, and in the prior quarter reported a positive earnings surprise of 5.9%. Over the last three months, the consensus earnings estimate for the third quarter of 2024 has increased from $7.72 to $10.01 per share, due to one upward revision. The consensus earnings estimate for full-year 2024 has increased from $30.980 to $36.757 per share, based on four upward revisions.

Qifu Technology has a Growth Grade of C, which is average. The company ranks in the 45th percentile for its five-year annualized sales growth rate of 29.6%.

Regional Management (RM) is a diversified consumer finance company that provides installment loan products, primarily to customers with limited access to credit from banks, thrifts, credit card companies and other lenders. The company offers both small and large installment loans. Small installment loans range from $500 to $2,500, with terms up to 48 months, while large installment loans range from $2,501 to $25,000, with terms between 18 and 60 months. Additionally, Regional Management provides optional payment and collateral protection insurance, including credit life insurance, accident and health insurance, involuntary unemployment insurance and personal property insurance. The company also offers indirect retail installment loans up to $7,500. Regional Management operates under the name Regional Finance.

Regional Management has a Quality Grade of A, with a score of 82, which is very strong. The company ranks strongly in terms of its return on invested capital and its F-Score. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position based on its profitability, leverage, liquidity and operating efficiency. The company’s return on invested capital of 541.3% ranks in the 99th percentile among all U.S.-listed stocks, and its F-Score of 6 ranks in the 71st percentile. Regional Management has a Z-Score of 4.55, above the sector median of 3.69.

Regional Management has a Value Grade of A, based on a score of 83, which is deep value. The company ranks in the 35th percentile for its shareholder yield and in the 25th percentile for its price-to-book ratio. The company has a shareholder yield of 1.4% and a price-to-book ratio of 0.91. A lower price-to-free-cash-flow ratio is considered better value, and Regional Management’s price-to-free-cash-flow ratio of 1.3 is below the sector median of 13.2. The price-to-sales ratio is 0.55, which ranks in the 21st percentile.

The company has a Momentum Grade of B, based on its Momentum Score of 70. This means that the stock’s momentum is average in terms of its weighted relative price strength over the last four quarters. The ranks are 78, 88, 38 and 27, respectively from the most recent quarter. The weighted four-quarter relative price strength is 1.6%.

Regional Management has a Growth Grade of A, which is very strong. The company ranks in the 73rd percentile for its five-year annualized sales growth rate of 12.4%.

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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.