After a slow start to the year, we finally got a standout IPO: Santander Consumer USA (SC). The company, which is the car financing division of mega Spanish bank Banco Santander SA (SAN), priced 75 million shares at $24 each, making the Santander IPO the first hit of the year.
And so far in today’s trading, SC stock is up about 8% after the Santander IPO (not a bad performance given that the Dow is off by 180 points). The lead underwriters on the deal included Citi (C) and JPMorgan Chase (JPM).
Founded in 1995, SC is the leader in the U.S. consumer car financing market, with a focus on subprime customers (those who have FICO scores below 660). While the market can be risky, the company has built a sophisticated analytics system that controls the exposures and helps with the pricing of loans. This system has helped the company add $34 billion in financing since 2008.
But SC has also been saving with partnerships. For the most part, the company has focused primarily on franchised auto dealers for manufacturers like Chrysler, Ford (F), General Motors (GM), and Toyota (TM). But there are also relationships with online operators as well, such as Cars.com, AutoTrader.com, Kelley Blue Book, and eBay’s (EBAY) eBay Motors.
All in all, SC has a history of posting juicy profits since well before the Santander IPO. For the first nine months of 2013, the earnings came to $581.7 million, or $1.69 per share. SC also plans to pay an annual dividend of 60 cents per share, which translates into a decent yield of 2.3%.
And SC stock is likely to see continued momentum. Let’s face it, the auto market has been strong as U.S. consumers look to replace their aging cars. The relatively low gas prices are another helpful factor, boosting the sales of trucks and SUVs. All of which means the Santander IPO was very well-timed.
However, SC stock could face some headwinds. If interest rates have another spike, that could put a crimp in sales. There will also likely be pressure from rivals, especially the major financial operators like Bank of America (BAC), Wells Fargo (WFC) and JPMorgan Chase. They are revving their car-loan businesses to find new sources of growth.
Despite all this, SC stock does look like a way to play the growth in the car market — as well as the rebound in consumer finance space. But interestingly enough, the other beneficiary should be SAN, which snagged $1 billion from the Santander IPO. The firm still owns 61% of SC stock.
Note: SAN stock is one of InvestorPlace’s 10 Best Stocks for 2014.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.