Santander Consumer is a subprime auto lender whose stock has gotten crushed this year. From its IPO price of $25 in January, SC has dropped over 30% to $17.50. Reasons are generally not related to the company’s fundamental performance however. 1) Regulators last May forced the company to halt its dividend, 2) its private equity sponsors dumped their last 10mm shares on the market in August, and 3) Q2 numbers seemed weak as loan loss provisions jumped. But despite very conservative provisioning, earnings were still up 34%.
Big picture: Santander Consumer is a quality underwriter who never lost money during the Great Recession, and since signing a 10 year contract to provide auto lending to Chrysler, should mean substantial market share gains over the next few years. ROE’s since 2010 have averaged in the high 20% range, and auto sales continue to grow nicely in the US. Worries about a subprime auto lending bubble are overblown too, as SC is well provisioned and today underwriting higher quality loans than they did prior to 2008/2009. To sum up, SC trades at under 8x 2014 earnings and I expect the stock to re-rate back to comp type levels in early 2015 after regulators allow a dividend to be reinstated, and investors get comfortable with the company’s provisioning for bad loans.
Generally speaking, comps in the subprime universe trade in a range of 9.0 – 12.0x this year’s earnings, and considering that SC generates better ROE’s than most, it should trade at the higher end of this range. Conservatively using the midpoint at 11x 2015 earnings, that would imply a value for SC shares of $27.60/share, up over 50% from today’s levels.
See link for full write up.
I do not hold a position of employment, directorship, or consultancy with the issuer. I and/or others I advise hold a material investment in the issuer's securities.
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