Is OneMain the Next Non-Prime Lending Winner?

The world of lending has become quite different since the recession. There are now websites and financial services companies that compete aggressively against the likes of commercial and consumer banks. OneMain Holdings Inc. (NYSE: OMF) is one such outfit, and Credit Suisse is telling its clients to aggressively buy this stock.

Credit Suisse reinstated coverage on OneMain Holdings with an Outperform rating and assigned it a $57.00 price target. In short, that leaves implied upside of more than 42% from Friday’s $40.00 close.

Moshe Orenbuch, the analyst who follows OneMain for Credit Suisse, said:

In our view, OneMain Holdings will be the dominant player in the nonprime consumer lending space, as its ability to combine the best attributes of the two leading branch systems (OneMain Financial and Springleaf) with a state-of-the-art online lending effort should result in industry leading
growth.

In addition to creating significant synergies by combining the branch networks, legacy OneMain was better at higher balance nonprime lending, while legacy Springleaf had advantages in auto finance as well as smaller balance/partially secured lending. As these skills are shared across the organization, this should enhance growth.

Orenbuch also sees opportunities for growth online. He thinks the online channel can generate leads into the branch that will give OneMain an advantage developing an online lending platform. Risks to that include credit quality and execution, as well as regulatory risks, as the Consumer Financial Protection Bureau is developing rules for small dollar lending.
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Another risk is that OneMain will be a highly leveraged company. Orenbuch’s report said:

We expect that the company will de-lever over the next ten quarters and note that the company has managed this risk well in the past. Our target price of $57 represents 9 times our 2017 core EPS estimate, the first period in which the merger benefits will be realized. That represents a discount to peers, despite our belief that OneMain should enjoy faster growth.

OneMain Holdings’ shares were last seen up seven cents at $40.07, with a 52-week range of $31.35 to $54.34. It also turns out that Orenbuch’s $57.00 price target is conservative, as the consensus analyst price target from Thomson Reuters is $61.85.