Payday loan stocks may perform strongly this summer as the U.S. economy appears headed for a situation that could benefit companies and consumers. With historically low unemployment rates and more people receiving paychecks, the potential for an expanded base of payday loan customers remains solid, especially as interest rates are expected to decline throughout the year.
Payday loan companies saw profit declines due to higher financing costs as interest rates rose in recent years. However, the current environment may drive a rebound. Besides encouraging consumers to spend more, lower borrowing costs mean that payday companies can access capital at reduced rates and lower operating costs.
With credit card balances increasing dramatically to $1.1 trillion, consumers may look to get more borrowing to make ends meet as delinquencies rise and they fall behind on payments. Recently, the number of credit card holders using over 90% of available credit reached a pandemic high of 16% of borrowers. As “maxed-out” borrowers fall delinquent, they may be forced to seek alternative financing until payday.
This combination of good and bad factors may particularly benefit payday loan stocks this summer. Lower capital costs may also coincide with growing demand for payday loans as consumer spending remains strong through the coming months when the need for credit typically surges.
World Acceptance (WRLD)
World Acceptance (NASDAQ:WRLD) is the first pick in the list of payday loan stocks to consider buying this summer. As one of the largest publicly traded payday loan companies, it has faced challenges over the past year due to rising borrowing costs. While revenue increased sequentially, profits dropped 58% last year.
Unsurprisingly, the WRLD stock price has not performed well and remains trading in the red compared to the end of last year. This is despite the company beating earnings estimates for the past four quarters in a row. A reduction in the Fed’s interest rates could allow World Acceptance to stage a turnaround and recover its share price.
Despite analysts’ pessimistic outlook, they still expect WRLD to rise around 10% to $137. With a price-to-earnings (P/E) ratio of just 9.5x, the WRLD stock may be undervalued relative to the average of 14.4x for firms in the consumer finance sector.
OppFi (OPFI)
The digital lender OppFi (NYSE:OPFI) is the second pick in this list of payday loan stocks to consider buying — although investors should note that OppFi is not a traditional payday loan provider. Instead, it offers an alternative form of installment loans, focusing its marketing on consumers struggling to access other solutions. Through aggressive expansion, the company has managed to avoid the impacts of high interest rates, as evidenced by consecutive quarterly EPS prints.
OppFi’s revenue increased by 130% compared to the previous quarter. Diluted EPS was up 400% year-over-year (YOY) in the last quarter compared to March 2023. The company’s CEO highlighted positive credit trends that had already appeared at the start of the year. Still, the OPFI stock price is trading at 30% lower year-to-date (YTD). It is selling at a P/E ratio below the industry average of 9.4x.
Analyst coverage is favorable, even more than WAC. Unanimous analyst consensus points to an average price target of $5.50 per share. This represents a potential upside of approximately 67%. Although it may not fully manifest this year, growth estimates for 2024 show a 17.60% growth.
First Cash Financial Services (FCFS)
First Cash Financial Services (NASDAQ:FCFS) is the last pick of payday loan stocks to consider grabbing this summer. While it primarily operates pawn shops, its business model has aspects similar to those of providing payday loans. The ability to secure assets seems to make First Cash a more appealing option for investors.
FCFS also reported subsequent EPS beats over the past few quarters. After registering record earnings in the previous quarter, the FCFS stock price declined as investors expected an even stronger performance. However, despite falling 11% since its April high, it is still up 10% YTD. This could now present an opportunity to get in, particularly as growth estimates show a 12.5% upside this year.
The company’s P/E ratio has fallen to 23.1x earnings as a result of the price drop. Although this may be above other payday loan companies, it is still below the average of 27.5x for the S&P 500. Analysts generally have a positive view, with a price target of $138.75 representing a potential upside of 11% from current levels.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
