CURO Group Holdings: The Downside May Not Be Complete

Summary

• Inflation and expensive lending will likely weigh on demand for consumer credit, of which CURO Group Holdings Corp. is a provider.
• With recession fears joining the team, even with an improved portfolio of products with lower failure rates, CURO likely won't have an easy time tackling it.
• The resulting headwinds, which have caused the stock to plummet so far, are on track to linger, so investors may want to consider a Sell rating.

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Elevated Inflation and Higher Borrowing Costs Weigh on Consumer Finance and its Providers, Including CURO Group Holdings Corp.

Increased inflation combined with higher borrowing costs due to the Fed's tight interest rate policy weighs on consumer non-staples stocks and stocks of credit lenders that provide the funds to afford non-essential goods and services. Shares of these stocks have fallen sharply year-to-date and are likely to decline further under the same unfavorable conditions.

Among the underperforming stocks of consumer finance providers, investors should consider softening their positions in CURO Group Holdings Corp. (NYSE:CURO).

Largely due to the same macroeconomic factors that have been unfavorable so far, this US-based credit services company is poised to see further deterioration in relevant financial and operating data, which could put severe downward pressure on the shares.

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The shares of CURO Group Holdings Corp. have plunged 79.2% this year, well worse than the 18.63% drop in the SPDR S&P 500 Trust ETF (SPY), which is used as the benchmark index for the U.S. stock market.

The 14-day CURO Group Holdings Relative Strength Index of 47.46 suggests that the oversold levels are still a long way from current levels, despite the stock price falling sharply year-to-date.

This suggests shares will have ample room for further declines if elevated inflation and higher borrowing costs continue to weigh on consumer finance. And current conditions are such that this scenario is likely to last for months heading into 2023.

The Economic Situation and its Impact on Credit Spending and its Financing

The fall in annual inflation to 7.1% in November from 7.7% in October represents a continuation of the improvement that started last July and shows that the central bank's policy of tightening interest rates is working, even if this inflation was not demand-driven.

This is a good result for the economy aiming for price stability and healthy employment levels, but with the monetary tightening the US Federal Reserve (Fed) is not done yet as additional rate hikes need to be implemented to bring inflation down to the target level of 2%.

In addition to the recessionary signals already being sent to consumers (consumption accounts for about 70% of the US GDP), more are set to come from the Fed soon. These will continue to influence consumers' perceptions of the current state of the economy (December's sub-reading has been revised downwards to 59.4 from a preliminary reading of 60.2) and their propensity to consume, affecting spending on certain non-essential products usually bought on credit.

That impact on consumption is already being felt, as US retail sales fell 0.6% in November compared to October, marking the sharpest fall since the start of the year. The categories with the largest declines in sales were goods typically bought on credit, such as furniture, vehicles, and electronics. Since the November data also included Black Friday on November 25 and Cyber Monday, which, as usual, offered heavy discounts, they provided strong evidence of a slowdown in consumer spending due to higher inflation combined with recession signals from higher interest rates.

CURO Group Holdings Corp. in the Credit Services Industry

CURO Group Holdings Corp. headquartered in Wichita, Kansas, has been a consumer finance provider in North America for over 25 years.

The company says it has developed a range of ease accessible financial services while reducing the risk.

CURO Group Holdings Corp. offers unsecured and secured installment loans, perpetual and one-time payment loans, and complementary financial products. The latter includes check-to-cash, reloadable prepaid debit cards, and demand deposit accounts. The offering also includes credit protection insurance, installment sales and money transfer services.

Third Quarter 2023 Financial Results: Elevated Inflation, US Fed's Hawkish Stance, and Recession Fears are the Bogey Team for CURO

Macroeconomic headwinds had a significant impact on sales and earnings in the third quarter of 2022.

CURO Group Holdings Corp. reported total revenue of $214.12 million, down 29.7% sequentially, and missed analysts' average forecast by $8.8 million.

Management attributed the lower sales to higher borrowing costs due to hawkish central bank stances and the weaker Canadian dollar against the US dollar.

The chart below, which shows the development of CURO Group's 12-month total revenues, hints at a loss in sales momentum from the second half of 2022, especially in connection with the strengthening of the recession signals from the North American central banks.

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With borrowing costs rising to fight entrenched inflation and the impact of rate hikes on consumption being felt even several months after the Fed's decision, I think risks to CURO's revenues will certainly remain on the downside for several quarters to come.

Year over year, total revenue increased by 2.3% in the third quarter of 2022. However, aside from strong growth in Canada POS Lending and Canada Direct Lending products, revenue benefited from inorganic catalysts following the July 2022 acquisition of First Heritage Credit, LLC and the December 2021 acquisition of Heights Finance. Both are providers of premium consumer credit and standard opt-in insurance products. First Heritage Credit was acquired for $140 million payable in cash. While Heights Finance was bought for $360 million, of which 93% was in cash and the rest in stock.

Not to mention, US revenues declined significantly during the quarter due to the sale of the US direct lending business.

The company also cited "credit trends normalizing to pre-pandemic levels" as another factor that could explain the decline in sales.

However, it should be noted that when compared to revenue of $297.26 million for the quarter that ended September 30, 2019 (this was the last Q3 before the COVID-19 outbreak in mid-March 2020), the loss of momentum seems to have been caused to a sheer drop in sales rather than a normalization of credit trends.

About the bottom line, the company reported a pro forma net loss of $11.9 million, or a pro forma net loss of $0.29 per share in the third quarter of 2022, missing the average estimate of analysts by $0.33. Also, the Q3 2022 bottom line result was a deterioration compared to the pro forma net income of $6.4 million or pro forma net income of $0.15 per share in the same quarter of 2021.

In addition to the decline in sales, the loss was explained by higher costs of borrowing, with which the company financed the acquisition of the above companies and the continuation of the business.

Lower demand for consumer credit due to ongoing risks of inflation and recession combined with rising borrowing costs is expected to continue to impact CURO's top and bottom lines in the coming quarters and potentially create strong headwinds for the share price.

Inorganic Catalysts Make the Loan Portfolio More Resilient, But That May Not Be Enough

Gross loan receivables rose 115% year over year to $1.01 billion in the third quarter of 2022, the company reported. However, the result was impacted by the acquisitions of Heights Finance and First Heritage.

In addition, there are certain indicators of the quality of CURO's loan portfolio, such as the risk of default or a certain percentage of overdue debt, which have improved, but not without the significant contribution of the two acquisitions, which have added products with a lower failure rate to the portfolio of the company.

This portfolio will certainly be more resilient to take the company through the next economic downturn, which is expected in 2023, but will not spare the company headwinds that will result from the expected strong increase in US consumers who will not meet their financial obligations for the next year with personal loans or credit card payments. According to TransUnion (TRU), as reported by Reuters, these types of delinquency rates are on track to reach their highest levels in the last 22 years.

The Stock Valuation

Shares have plummeted over the past year and are now trading below the long-term trend of $6.92 and the $10.1 median of the 52-week range of $2.97 to $17.23.

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The share price of $3.52 with a market cap of $139.27 million at the time of writing is low based on the above comparisons, but this condition is not enough to imply a Buy rating.

High inflation, consumer credit suddenly becoming very expensive and the recession that will most likely hit in 2023 could pose additional headwinds for the stock, and that means investors should consider softening their positions.

It is also possible that shares will recover from current levels, but objectively this is unlikely to happen in such a macroeconomic environment.

CURO Group Holdings Corp. pays a small quarterly dividend of $0.11 per share, resulting in a forward dividend yield of 12.6% as of this writing. The dividend could be subject to the same tensions that weigh on sales and earnings.

Conclusion

The current macro economy is not favorable for this stock and the future will not be any better in my opinion, as inflation and expensive consumer credit will reduce consumers' willingness to purchase non-essential goods and services and certainly not on credit.

Even the economic slowdown in 2023 will not encourage consumers to engage in shopping activities if the cycle causes people to lose their jobs.

Because of these headwinds, the stock has plummeted to low levels and is likely on track to fall further, so investors may want to consider a Sell rating.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.