After the market closed on 2/25/25, Consumer Portfolio Services (NASDAQ:CPSS) reported 4Q24 earnings results. For the quarter, CPSS reported net income of $5.1 million, or $0.21 per share versus our $0.27 EPS estimate. Relative to our model, despite more favorable revenue trends, the EPS miss was mostly a function of higher G&A, interest, and other expenses partially offset by slightly lower-than-anticipated compensation costs.
After updating our model for 4Q24 actuals, we are lowering our 2025 EPS estimate from $2.66 to $1.81. Despite a more favorable revenue outlook, our lower 2025 earnings estimate primarily reflects higher G&A, interest, and other expenses going forward, partially offset by a steeper revenue growth trajectory. Moreover, we are introducing a 2026 EPS estimate of $2.89 representing 59% year-over-year growth.
Turning to valuation, despite our lower earnings outlook, we are leaving our 12-month price target unchanged at $18 – representing meaningful upside potential from current levels. Our model forecasts CPSS’s book value per diluted share to reach $13.85 by the end of 2025, with ROEs rising from a nadir of 6.6% in 1Q24 to 14.1% this year and a more “normalized” 20% looking out to 2026 largely reflecting reaccelerating growth in loan originations and related finance receivables, as well as lower cost of funds. As the “Street” increasingly recognizes the company’s growth trajectory and underlying earnings power, we look for a meaningful upward revaluation for the stock, particularly given relative multiples.
To be sure, Price-to-Tangible Book Value and Price-to-Earnings multiples remain meaningfully higher across a subset of public companies with sizeable auto finance businesses. While we recognize most peer companies are significantly larger and more diversified, with considerable infrastructure, resource, and financial advantages, CPSS maintains a sizeable lead in terms of projected growth, thereby justifying comparable multiples, in our minds. Our $18 price target assumes the stock trades at ~1.5x current book value of $12.06.
We highlight the following key takeaways from 4Q24 results:
1. All systems go for originations and ABS deals: The company’s total portfolio balance of $3.5 billion as of the end of 2024 increased by 5% compared to $3.3 billion as of the end of 3Q24 and 18% for the year. Loan origination volumes continue to ramp up, with CPSS purchasing $458 million of new auto installment sales contracts in 4Q24 compared to $446 million in 3Q24 and $302 million in 4Q23. Looking ahead, our model calls for $2.0 billion of loan originations in 2025 (up 19% year-over-year) followed by $2.2 billion next year (representing a more conservative 10% growth rate). Growth drivers likely include:
i. accelerating applications as demand remains strong;
iii. the company’s expanding salesforce (25 new hires in 2023 followed by 42 in 2024);
iv. improving productivity, with higher funding dealers per representative and capture rates;
v. a broader footprint focused on increasingly penetrating the top-performing 22 states and tapping into geographic pockets across the residual 28 states;
vi. an improving mix, with larger dealer groups (10+ lots) representing 28% of originations in 2024, up from 20% in 2023;
vii. lower funding times (down to around two days on average versus approximately four days a couple of years ago), thereby enhancing customer service with dealers; and
viii. accelerating loan volumes sourced via the company’s pass-through arrangement with Ally Financial.
On the funding side, CPSS completed the company’s 54th securitization by selling $442 million of asset-backed notes (with a weighted-average yield on the notes of approximately 5.88%) in January, up from the $417 million raised from the prior transaction – reinforcing investor demand for CPSS paper remains strong. Moreover, management recently upsized one of the company’s credit facilities by $110 million to $335 million, thereby providing incremental capacity to fund accelerating loan growth.
2. Credit trends – separating absolute vs. relative performance: For 4Q24, annualized net charge-offs represented 8.02% of CPSS’s average portfolio balance, up 28 bps from 7.74% in 4Q23 and 70 bps compared to 7.32% in the prior quarter. Delinquencies greater than 30 days (including repossession inventory) accounted for 14.85% of the total portfolio balance as of December 31, 2024, up from 14.45% a year ago and 14.04% as of September 30, 2024. That said, we look for improving credit trends over time reflecting low unemployment rates, and as problematic 2022 loans continue to vintage (down to ~20% of the total portfolio and likely mostly rolling off by the end of this year) and newer/higher-quality paper increasingly assumes a greater percentage of the mix. And importantly, CPSS maintains strong relative investment performance track records across cycles (outperforming peers by 200 bps to 400 bps on Cumulative Net Losses) reflecting the company’s enhanced AI-driven underwriting model, improving credit metrics (debt/income, FICO scores, LTVs, etc.), rising collections increasingly leveraging AI VoiceBots, and the team’s expertise/tenure.
3. Earnings power set to step up: Despite our lower EPS outlook for 2025, our revised estimate for this year and newly introduced 2026 forecast translate into outsized expected growth rates. Our ongoing bullishness primarily reflects accelerating revenues driven by continued growth in CPSS’s portfolio balance and steady APRs/risk-adjusted yields. Furthermore, we forecast rising risk-adjusted Net Interest Margins through next year, even as the NIM ticked down by 10 bps quarter-over-quarter in 4Q24. Much of our thinking reflects lower cost of funds (based on ongoing Fed rate cuts), with our estimates assuming interest expense as a percentage of average portfolio balances (6.1% in 4Q24) tightens by 50 basis points this year followed by a further ~70 basis points looking out to 2026. To be conservative, our model incorporates a cost of funds of 4.9% for next year, still above the company’s historical average of around 4.5%. Finally, while our revised EPS estimates build in operating expense inflation, as the business continues to scale, we still see meaningful operating leverage driving outsized margin expansion reflecting existing infrastructure and management’s ongoing focus on extracting further efficiencies. Indeed, our model assumes operating margins (7.0% in 4Q24) return to 2022 run-rates (17.4%) over the next 18 months, while ROAs trend from 0.9% for the most recent quarter to 2.2% in 2026 (consistent with CPSS’s return on assets in 2022).
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