A Small-Cap Value Stock With a Better-Than-Average Dividend

Regional Management has a good margin of safety and solid financial metrics

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Nov 28, 2022
Summary
  • The company provides credit to customers who do not qualify for a regular bank loan.
  • It has strong financials, profitability and growth metrics, as well as a dividend that is more than double the S&P 500 average.
  • Regional Management sits on the Undervalued Predictable list because it is undervalued and has predictable revenue growth.
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Regional Management Corp. (RM, Financial) has the distinction, dubious or otherwise, of sitting at the top of the Undervalued Predictable screener list.

It got to the top because the discounted cash flow calculator considers it the most undervalued stock, based on the free cash flow model. But even the earnings-based model puts it high on the list.

According to the Undervalued Predictable criteria, it is 95% undervalued on the FCF model and 77% undervalued on the earnings model. That is a significant discount for value investors to consider.

About Regional Management

The company serves customers who have limited access to credit from banks, credit card companies and other lenders. It has carved out a niche between these conventional lenders and sources such as payday loans, pawn shops and title lenders.

Based in Greer, South Carolina, the company had a market cap of $281.25 million at the close of trading on Nov. 25, 2022.

According to its third-quarter 2022 earnings report, it enjoyed brisk financial growth. Highlights included:

  • Operations expanded into California and Louisiana.
  • It grew its account base to more than 500,000 accounts.
  • Grew its loan portfolio to an all-time high of $1.6 billion.
  • It delivered double-digit year-over-year growth in its net finance receivables and quarterly revenue for the sixth straight quarter.

Competition

Regional reported in its 10-K for 2021 that the consumer finance industry is highly fragmented and involves many competitors. For its small and large loan business, it faces several national companies with more than 800 branch locations (it had 338 branches at the end of the third quarter).

Retail loans originate with third-party retailers that use Regional’s credit facilities. In this area, it sees a growing number of competitors offering non-prime loans.

While the company does not name competitors, GuruFocus lists 11 of them. Five on that list have larger market caps:

The company argued in the annual report that it has two competitive advantages. First, it has a diverse line of loan products with competitive, safe and transparent pricing. In addition, it provides opportunities for its customers to improve their credit history.

Second, it has a multiple channel platform, which includes its local branches, direct mail campaigns, digital partners, third-party retailers and a consumer website.

This performance chart shows Regional has outperformed two if its key competitors over the past decade:

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Financial strength

Because Regional is a financial company, much of the information we normally take from the financial strength table is not relevant.

From another perspective, in the third quarter earnings report, which was released Nov. 1, President and CEO Robert Beck noted its delinquency rate remains stable. He said, “With a reserve rate of 11.2%, including $19 million of macro-related reserves, we feel very comfortable with our current credit posture. Our primary focus remains on maintaining the credit quality of our loan portfolio, supporting our customers, and controlling expenses, and we stand ready to adapt our underwriting models quickly whenever we observe either risks or opportunities in the market based on changing economic conditions.”

Profitability

The value of Regional’s profitability ranking is also limited, since the ranking is based mainly on the operating margin, which is not available to this financial stock.

However, I do note that it has been profitable every year for the past 10 years. As this trailing 12-month earnings per share without non-recurring items chart shows, profitability has shot up over the past four quarters.

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Growth

The growth ranking, which is 9 out 10, is relevant. It is based on three- and five-year revenue growth, five-year Ebitda growth and the predictability of five-year revenue.

As a starting point, we take a hint from the predictability ranking, which is 4 out of 5 stars. It, too, is based on revenue and Ebitda. While Ebitda is not a factor here, Regional’s revenue growth has been remarkably consistent.

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Free cash flow growth over the past three years has been solid as well, averaging 14% per year.

Dividends and buybacks

Because the share price has fallen so far, it now has a generous dividend, without the dividend payout ratio rising:

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As the table indicates, Regional has ambitiously repurchased shares over the past three years. But the buybacks started even earlier:

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Valuation

Regional receives 8 out of 10 as a valuation rank, based on the price-to-GF Value ratio (which includes historical multiples plus proprietary adjustments and estimates). The closing price on Friday, Nov. 25 was $29.34, while the GF Value was $55.08.

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Turning to other valuation metrics, the price-earnings ratio is 4.19, which is lower, or better, than 87.4% of stocks in the credit services industry.

And the DCF calculations, whether for the free cash flow model or the earnings model, signal undervaluation:

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Each of these sources indicates the company is available at a discount and provides a margin of safety.

Gurus

Only two of the legendary investors held positions in Regional at the end of the third quarter. After reducing its holding by just over 10%, Jim Simons (Trades, Portfolio)' Renaissance Technologies held 240,137 shares, good for a 2.5% stake in Regional and making up 0.01% of the firm's assets under management.

Jeremy Grantham (Trades, Portfolio) of GMO LLC held 10,306 shares after reducing his stake by 47.69%.

Institutional investors have no shares, while insiders hold 9.29% of the shares outstanding. The largest insider holding is that of independent director Steven Jay Freiberg, who owned 104,648 shares as of May 26. Nine other insiders own more than 20,000 shares each.

Conclusion

Regional Management meets the requirements to be an Undervalued Predictable stock, with relatively high predictability and an undervalued price.

When I also consider the company’s solid financial position, it has the criteria to be a value stock.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure