OneMain Holdings: Right On Target And Not Too Expensive (Yet)
Summary
- OneMain reported its Q1 earnings last week demonstrating that the business performed quite well in the quarter.
- Management continues take a shareholder-friendly stance by increasing regular quarterly dividends to $0.70/share and authorizing a $150MM share repurchase plan.
- On track to embark on a potentially transformational process taking the first plunge with a credit card offering in 2H 2021.
OneMain Holdings (NYSE:OMF) shared its quarterly performance last week, and the results were quite favorable with "pretax income of $546 million and net income of $413 million for the first quarter of 2021 compared to $43 million and $32 million, respectively, in the prior year quarter," according to the company's earnings press release. In terms of per share metrics, "earnings per diluted share were $3.06 in the first quarter of 2021 compared to $0.24 in the prior year quarter."
The easiest way to synthesize what transpired in Q1 and how the company is positioned for the quarters ahead can be seen on the following slide provided by the company:
A few points that stand out to me include:
- Shareholder returns
- Risk management
- Status update on the credit card
Management announced plans to buy back $150MM of shares over an undisclosed period of time which at the current price level implies some ~2.5MM shares outstanding that will vanish over time and a decision to increase the minimum quarterly dividend by 56% to $0.70 per share, positioning OMF investors with a 5%+ yield at approximate current prices, which is hopefully a kicker tell-tale on a constructive long-term view of the company's prospects.
In terms of underlying business risk and risk management, charge-offs actually declined Y/Y as consumers have been strapped and re-strapped as the government continued aggressive stimulus efforts of historic proportions so consumers have been able to keep up payments even better than budgeted for so to speak. The other side of this same coin is loan originations were not quite as robust as they otherwise could have been but for the stimulus programs.
In plain terms, originating bridge loan funding for consumers who had a bridge handed to them from Uncle Sam is a bit challenging. My reading of this is that net-net, it's constructive. I don't really believe the government will endlessly keep providing stimulus funding so somewhat tepid origination growth falls more in the short term issues bucket from my POV.
Additionally let's face it about this time last year and everyone was pretty well freaked the heck out that the world was going to come to an end, and in the case of consumer finance, loans were going to default in historic proportions. At this point it seems reasonable to return to my standard modus operandi - the world only ends once, and this is probably not it (and that is a good thing).
The company shared during the quarterly conference call that it has chosen a credit card partner in Mastercard (MA) and they remain on track to roll out the card offering in the second half of 2021. I continue to believe the card provides an interesting transformational opportunity that could add a nice premium into the valuation.
Post the Q1 earnings report, Seeking Alpha is showing the relative valuation of OMF dropped from 10x TTM down to slightly below 7x TTM earnings, pretty cheap and with a +5% dividend yield.
When I plug in the updated figures into my simple valuation framework and naively adjust for the potential share buyback I am coming up with ~$65 per share as my intrinsic value estimate. I am almost confident I am understating this estimate considerably as I am explicitly taking a heavy hand to knock down ROE figures in the future, and although I like the credit card business OMF is going after from a conceptual basis, I don't know how to think about that from a valuation perspective yet.
Nonetheless when OMF got knocked down well under $55 due to the secondary offering placement by a current shareholder, I felt reasonably okay buying some shares at that price. I mean my goodness... it's 18% below my (I think) conservative view of intrinsic value, less than 7x TTM earnings and yields +5% and has a management team that seems to be pretty darn thoughtful as it considers issues such as risk, capacity, shareholder returns as it approaches to building out this business. What's not to like?
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Analyst’s Disclosure: I am/we are long OMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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