InvestorPlace contributor Vince Martin recently named LendingClub Corp (NYSE:LC) one of 10 companies that won’t exist a decade from now. Martin believes LendingClub will either be acquired by another company or go bankrupt; either way, LC stock will fail to exist on the public markets.
These are two diametrically opposite results.
Owners of LC stock clearly want the former for this beleaguered stock, and the answer starts with LendingClub earnings due out Thursday after the markets close.
We already know that LendingClub’s first-quarter results are likely to be worse than last year’s Q1 earnings report. How much worse we will soon find out, but analysts estimate that revenues and earnings will decline 19% and 267%, respectively, taking a 3-cent profit and turning it into a 3-cent loss.
Ouch.
I thought it would be interesting to examine more closely the idea that LendingClub’s future is one, as Martin suggests, in which only two options exist — bankruptcy or buyout — and the odds of each coming to fruition. By the end, I you should have an idea about whether it makes sense to buy or sell LC stock.
LendingClub Bankruptcy
A SeekingAlpha article entitled Is LendingClub On Its Way To Bankruptcy? focused less on the company’s potential to go broke and more on the management team’s outlandish compensation. Many of the comments accompanying the article questioned the relevance of compensation in such a discussion. I don’t. It speaks to the mindset of the board of directors and how they feel about corporate governance. It’s a red flag for sure.
However, any discussion about bankruptcy should spend some time diving into the numbers.
I often use the Altman Z-Score to give me an idea of a company’s financial stability, but it’s an imperfect statistical model that was originally created for manufacturing companies.
In 1995, Altman took out the fifth component (Sales/Total Assets) of the Z-Score calculation to use for non-manufacturing companies. I’ll use that. It’s important to note that working capital is my estimation of the company’s current assets and liabilities as financial institutions don’t identify this.
Lending Club Altman Z-Score
| Working Capital | 662,600,000 |
| Total Assets | 5,562,631,000 |
| Retained Earnings | –234,187,000 |
| EBITDA | -116,000,000 |
| Market Cap | 2,260,000,000 |
| Total Liabilities | 4,586,861,000 |
| Score | 1.02 |
Source: LendingClub 2016 10-K
Anything less than 1.8 is said to be an indication a company may go bankrupt within the next 24 months. However, It’s important to compare LendingClub with other financial institutions to understand its situation in relation to its peers in financial services.
I haven’t done that in this instance because analysts expect LendingClub to make money in 2017 and beyond. Therefore, it’s likely that LendingClub’s Z-Score will improve dramatically in the next few quarters.
As a result, I’d be reluctant to suggest LC is in any imminent danger of going bankrupt.
LendingClub Buyout
Last November, LendingClub inked a deal with Credigy Solutions, National Bank of Canada’s (OTCMKTS:NTIOF) consumer finance business, to buy $1.3 billion in loans over the next 12 months from LendingClub. The loans are of the highest quality assuring investors that its lending platform is in perfect working order.
“We see the Credigy program as a way we’re further diversifying our investor base and adding the funding visibility and stability that can make us even more resilient in various market conditions,” LendingClub CEO Scott Sanborn said at the time.
The way I see it, National Bank doesn’t sign on to buy these loans if it doesn’t believe in LendingClub’s business model. LC stock went out the door in December 2014 at $15 per share and a market cap of $5.4 billion. Today, it’s less than half that.
Several analysts have recently upgraded LC stock to a buy from a neutral or hold call including Guggenheim Securities who gave it a $7-$9 12-month price target in March.
My first suspect to buy LendingClub, assuming the loan-buying goes well, would be National Bank itself. All the Canadian banks are looking to grow beyond their borders, and NTIOF is no exception.
Bottom Line on LC Stock
If I were to pick the more likely scenario between a bankruptcy and a buyout, I’d have to go with a buyout.
And at current prices, I’d be a speculative buyer of LC stock.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
