OneMain Holdings: Too Cheap With A Big Yield

Summary

• Today, we revisit OneMain Holdings for the first time since late in 2021.
• The stock has slid some 15% since then despite solid results, recent insider buying, and a boost of its dividend yield to 9%.
• A full investment analysis follows in the paragraphs below.
• Looking for a helping hand in the market? Members of The Insiders Forum get exclusive ideas and guidance to navigate any climate. Learn More »

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Words rich in meaning can be cheap in sound effects.”― Dejan Stojanovic

It has been some six months since we last took an in-depth look at OneMain Holdings (NYSE:OMF). Since that article was posted, the company has posted a couple of solid quarterly earnings reports. Despite this, the stock has languished like most equities have during the tepid market that has greeted investors so far in 2022. The stock has a big dividend yield and is very reasonable on an earnings basis, making this a good time to circle back on this cheap financial name. A full analysis follows below.

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Company Overview:

OneMain Holdings is headquartered in Evansville, IN. The company originates, underwrites, and services personal loans secured by automobiles, other titled collateral, or unsecured. These 'near’ prime personal loans and insurance products are offered online and through ~1,400 branch offices in 44 states. The stock currently trades right at $43.00 a share and sports an approximate market capitalization of $5.3 billion.

February Company Presentation

First Quarter Results:

On April 28th, the company posted first quarter results. OneMain had non-GAAP earnings of $2.35 a share as revenues rose just over 7% on a year-over-year basis to $1.03 billion. Both top and bottom line numbers slightly beat expectations. Here are some of the highlights the company highlighted in its first quarter earnings press release.

• Originations totaled $3.0 billion in the first quarter of 2022, up 30% from $2.3 billion in the prior-year quarter.
• The percentage of secured originations was 52% in the first quarter of 2022, up from 50% in the prior-year quarter.
• Managed receivables, which include loans serviced for our whole loan sale partners, were $19.5 billion at March 31, 2022, up 11% from $17.6 billion at March 31, 2021.
• Ending net finance receivables were $19.0 billion at March 31, 2022, up 8% from $17.6 billion at March 31, 2021.
• Secured receivables were 52% of ending net finance receivables at March 31, 2022, consistent with March 31, 2021.
• Average net finance receivables were $19.1 billion in the first quarter of 2022, up 7% from $17.8 billion in the prior-year quarter.
• Interest income in the first quarter of 2022 was $1.1 billion, up 3% compared to the prior-year quarter, reflecting higher average net finance receivables, partially offset by a lower portfolio yield.

There were a couple of negative trends to keep an eye on, however.

• Yield was 23.11% in the first quarter of 2022, down from 24.04% in the prior-year quarter.
• The 90+ day delinquency ratio, excluding credit cards, was 2.21% at March 31, 2022, up from 2.00% at December 31, 2021, and 1.82% at March 31, 2021.
• The net charge-off ratio, excluding credit cards, was 5.58% in the first quarter of 2022, up from 4.24% in the fourth quarter of 2021 and 4.67% in the prior-year quarter.

These were key reasons the stock declined slightly after results were posted despite the headline 'beat'. The company's CEO did state the following about his outlook for the company.

We had a strong start to 2022 with a very good quarter underpinned by continued robust demand for our core loan product and bolstered by new products and channels. We continue to feel great about our growth prospects in 2022 and beyond.”

Analyst Commentary & Balance Sheet:

Since the company posted first quarter numbers, eight analyst firms including Citigroup, RBC Capital, and Piper Sandler have reissued Buy or Outperform ratings, albeit a few with slight downward price target revisions. Current price targets proffered range from $54 to $75.

Just over two percent of the outstanding float of the stock is currently held short. The CEO added just over $100,000 to his holdings on May 10th following just over $90,000 worth of shares in March. There has been no insider selling in the stock since August of last year and that was by a beneficial owner not an officer of the company.

Leadership described its balance sheet at the end of March in the following way:

Cash and cash equivalents, together with the Company’s potential borrowings of $1.0 billion of undrawn committed capacity from a corporate revolver, $5.4 billion of undrawn committed capacity under the revolving conduit facilities, and $10.2 billion of unencumbered loans, provide a liquidity runway in excess of 24 months under numerous stress scenarios and assuming no access to the capital markets. This liquidity runway calculation contemplates all the cash needs of the Company."

OneMain Holdings bought back $110 million worth of stock in the third quarter. It also declared 95 cents a share quarterly dividend, which is up from 70 cents a share when we last put OneMain in the spotlight near the close of 2021. The stock now yields some nine percent annually.

Verdict:

The current analysis consensus calls for OneMain to earning roughly $8.80 a share in FY2022 as revenues include 11% to some $3.8 billion. That puts the valuation on the stock at five times forward earnings. While FY2022's earnings are projected to down two bucks a share from FY2021, this seems more than cheap.

February Company Presentation

Yes, if economic activity gets further constrained by higher interest rates and slowing growth, the company's customers could come under increasing financial stress. This would continue to boost delinquency and write-off rates. This is key reason the stock is down some 15% since we last looked at it despite the boost in dividend. However, at under four times the past 12 months of earnings with a nine percent yield to boot, a ton of bad news already seems more than baked into the stock. The dividend payouts are well-covered by earnings as well.

Many great opportunities are not cheap; but some cheap opportunities are so great.”― Iveta Cherneva

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Disclosure: I/we have a beneficial long position in the shares of OMF either through stock ownership, options, or other derivatives. 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.