We came across a bullish thesis on Bread Financial Holdings, Inc. (BFH) on Substack by Stock Analysis Compilation. In this article, we will summarize the bulls’ thesis on BFH. Bread Financial Holdings, Inc. (BFH)'s share was trading at $57.18 as of Nov 20^th. BFH’s trailing and forward P/E were 9.02 and 8.67 respectively according to Yahoo Finance.

Bread Financial (BFH) presents a compelling investment opportunity, underpinned by its robust loan growth, strategic debt reduction, and an expanding direct-to-consumer (DTC) funding base. Despite near-term challenges, such as rising loss rates on customer loans and impending late-fee regulations, management is targeting long-term loan growth in the mid-to-high single digits and returns on tangible common equity (ROTCE) in the mid-to-high 20% range, exceeding the 21.8% achieved in 2Q24. The company’s proactive measures to strengthen its financial position, including a 62% reduction in parent-level debt since 3Q21 and a 270 basis point increase in its common equity tier 1 (CET1) ratio to 13.3%, highlight its resilience and preparedness for a challenging economic environment. Additionally, Bread’s reserve rates, now exceeding 12% compared to a net loss rate below 9%, indicate potential future earnings upside if economic conditions stabilize.

The transformation of Bread’s funding base adds further appeal to its investment case. The company’s online DTC deposits have grown at a 48% compound annual growth rate (CAGR) since 2020, reaching over $7 billion by the end of 3Q24 and now comprising 41% of total funding, compared to just 6% four years ago. This shift reduces reliance on higher-cost funding sources, such as wholesale deposits and unsecured funding, potentially lowering the company’s cost of capital and enhancing profitability. Management’s ambition to grow the DTC deposit base to 50% of total funding demonstrates a clear path toward financial optimization. This strategic pivot has already yielded tangible benefits, with Bread’s tangible book value (TBV) per share nearly tripling since 2020 to $47.48 by the end of 3Q24. Yet, the stock trades at just 1.05x TBV, representing a significant 57% discount to its peer group, including Synchrony Financial, Discover, and Sofi Technologies.

With the stock deeply undervalued relative to peers, Bread Financial offers a unique blend of downside protection and significant upside potential, making it a compelling opportunity for investors seeking value and growth.

Bread Financial Holdings, Inc. (BFH) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 32 hedge fund portfolios held BFH at the end of the third quarter which was 26 in the previous quarter. While we acknowledge the risk and potential of BFH as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BFH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.