World Acceptance: Showing Some Signs Of Life (WRLD)

Introduction

The last quarterly report from the company managed to showcase a decent improvement in one of the more important areas for the company, its delinquency rates. The move was positive and the rate for 90+ was reduced to 3.5%, down from 4.1% in the previous quarter. Apart from that, there was a slight increase in the gross loans which has aided the company in growing its value and book value per share too.

Engaging in the consumer finance market though where they focus on short-term loans is a risky business in my opinion and one that should come with a discount. The market seems to already think poorly of the business as the short interest is over 35% currently, which is incredibly high. This might come from the poor outlook for some Americans in their financial stability in the coming years as interest rates are starting to squeeze the market. I don’t like the current price and the lack of a dividend makes me more prone to have a hold rating for World Acceptance Corporation (NASDAQ:WRLD) right now rather than a buy. Until the valuation goes down to a p/e around 7 – 8 I wouldn’t consider it a buy. The short interest could also start to weigh heavily on the share price in the near term.

Company Structure

World Acceptance Corporation operates within the consumer finance sector in the United States, providing a range of financial solutions to individuals. The company’s offerings encompass short-term small installment loans, as well as medium-term larger installment loans, complemented by associated credit insurance, and additional products and services designed to meet the needs of its customers. Notably, the company also extends its services to include income tax return preparation and filing, as well as automobile club memberships.

With a targeted focus on individuals with limited access to traditional avenues of consumer credit, such as banks and credit unions, World Acceptance Corporation plays a pivotal role in bridging the gap and catering to the financial needs of underserved communities. This unique positioning enables the company to serve a niche market segment that often lacks access to mainstream financial services. The target customer base that WRLD has is quite risky as short-term loans are often associated with distressed financial situations where higher delinquency rates on lows are also more common. This means that WRLD needs to be very good at properly adding customers that offer the least possible risk to not derail the loan portfolio.

Earnings Transcript

From the last earnings call by the company, the CEO Chad Prashad had some good comments on the current market climate and how the company is positioning itself to deliver strong growth going forward.

We have weathered a period of delinquency normalization after a period of extraordinary portfolio growth as well as higher-than-expected delinquency and losses throughout most of our last fiscal year. Today, we continue to see lower and normalizing delinquency rates in our portfolio as well as increasing yields and expect this trend to continue for several more months. This is primarily due to many operations adjustments, including a heightened focus on credit quality and yields as we previously discussed”.

It seems that the worst has passed for the company, at least according to these comments. However, I do remain somewhat cautious as if the FED decides to have prolonged interest rates then there is a strong likelihood of the delinquency rates not falling, but rather remaining where they are. That will be a thorn in the side of the company’s earnings and could cause the share price to fall to reflect the added risk with an investment.

We’re also very consciously increasing approval rates to new customers as we still see the potential of this uncertain economic environment to impact our customers in the coming year. During the first quarter, our customer base grew more than the prior three years, both in nominal and relative terms”.

WRLD still sees a lot of potential in the current market and that has me somewhat optimistic at least. I still think though that WRLD would do good from perhaps consolidating somewhat right now. Customer growth is great, but adding for the sake of adding might turn out to bite them back in the future if interest rates remain high as inflation could potentially bounce once again before going lower.

Valuation & Comparison

One of the key issues I have with the company right now is the valuation. With a nearly 50% premium based on earnings to the sector, I don’t think WRLD has justified it yet. They have been able to grow their customers but are still in a risky position as the delinquency rates are elevated and could stay that way for some time.

Where I would be interested in buying is around 7 – 8x earnings and a p/b closer to 1, which right now is at 1.8. If WRLD continues adding customers though, the book value will go up as the asset base grows, but that may take some time and still leave WRLD in a decently overpriced territory for investment.

Risk Associated

Should WRLD encounter challenges in accurately assessing the quality of its loans, and subsequently experience an elevated rate of loan defaults, the integrity of the company’s loan portfolio could be compromised, resulting in potential devaluation. This, in turn, could exert downward pressure on the company’s share price, as investors react to the perceived risk associated with the loan portfolio’s performance.

To maintain investor confidence and support a favorable share price trajectory, WRLD must consistently demonstrate its ability to effectively evaluate the creditworthiness of its borrowers and mitigate the risk of loan defaults. Accurate risk assessment practices are paramount to sustaining the perceived value of the loan portfolio and, by extension, safeguarding the interests of shareholders.

The challenge going forward for the company will be to maintain the momentum of bottom-line growth. Last quarter saw the net income land at $9.5 million. But to make the near 50% earnings premium the company is receiving right now I think there needs to be visible and consistent growth to the bottom line and that will mostly come from strong loan acquisitions and signings that have been properly valued and are unlikely to result in higher delinquencies.

Investor Takeaway

Right now I think WRLD offers too much risk unfortunately to invest. The valuation is at a big premium and I would rather have it as a hold than a buy right now. Going into the coming quarters I think a key highlight to watch is the delinquency rates. If we see an unexpected spike in it I can see the share price falling quite quickly to reflect the added risks with the company. But for the moment it remains to be a hold.