Are Investors in for a Good Ride With This Subprime Lender's IPO?

Source: Santander Consumer USA.

Last week, auto-financing specialist Santander Consumer USA Holdings  (NYSE: SC  ) parked itself on the market, with its shares making their debut on the New York Stock Exchange. As the name implies, the company is one of the many publicly traded arms of sprawling Spanish lender Banco Santander (NYSE: SAN  ) . Not for the first time, a piece of one of the bank's subsidiaries has made its way to the market. These issues have met with mixed success; let's take a look and see what direction SCUSA stock might veer in the future.

Driven to market
The company's major shareholders, including KKR & Co. and daddy Banco Santander, unloaded nearly 75 million shares at $24 apiece in the company's IPO to raise around $1.8 billion. That price hit the top of the anticipated $22 to $24 per share range, and the offering was upsized (originally, it was to be just over 65 million shares). There was demand for that fattened issue; it opened higher on the market last week, at $25.75, before slipping to $25.20 on closing.

But that popularity has to be balanced against the historical performance of Santander's floats. The company's first try has been a winner -- in 1997, it listed American Depositary Shares of successful South American unit Banco Santander-Chile (NYSE: BSAC  ) . Although down from a peak earlier this decade, the ADSes are still worth nearly three times what they closed at on IPO day. 

The company also had a big-ticket IPO in 2009 with the flotation of Banco Santander Brasil (NYSE: BSBR  ) , which was well timed to take advantage of a period of hot growth in the South American country. The 15% Santander sold in the unit reaped a mighty $8 billion for the company, making it one of the biggest NYSE issues that year.The party didn't last, however, and the stock followed the decline of its nation's economic growth. These days, it's the anti-Banco Santander-Chile, trading at just over one-third of its IPO day's closing price.

Occupying the middle ground between those two issues is Grupo Financiero Santander Mexico (NYSE: BSMX  ) . After a decent run in the first year of its life following a September, 2012 IPO, Mexico has since lost its breath. At the current price of $12.59 apiece, the company's American Depositary Shares trade slightly below the level of their day one close.

A different model
Unlike its parent and its cousins, Santander Consumer USA Holdings (papa Santander isn't known for devising snappy company names) has the advantage of not being a lender situated in a struggling Latin American or European country. Rather, it's pegged to a growing segment of consumer finance in a healthier economy.

In 2013, U.S. vehicle sales rose for the fourth year in a row to total of 15.6 million automobiles, or roughly 50% higher than the 2009 count, according to figures from industry researcher Autodata Corp. cited by Bloomberg Business Week.

Source: Santander Consumer USA.

More cars means more borrowing, and SCUSA has been doing its share. Its take from interest and fees on finance receivables and loans was just over $1 billion for its most recent quarter, a nice jump from the $745 million in the same period the previous year.

The catch is that, since the bulk of the company's loans are to what it terms "nonprime" borrowers,it has to set aside big piles of money as provisions against loan losses. These nearly doubled in the aforementioned period, to $448 million from $244 million.

Still, the company is consistently profitable, and its margins are wide. For the first nine months of last year, its attributable net was nearly $584 million on $2.7 billion in interest and fees on finance receivables. That didn't eclipse January-September 2012's attributable net of $596 million, but it handily beat the $2.2 billion SCUSA posted in the latter line item.

The Foolish takeaway
Santander is going to do its best to keep SCUSA on the road -- as with all of its floated subsidiaries, it's retaining a majority stake (61%) in the company.That's one plus for the auto lending subsidiary. Another is that its target market is healthy and growing at the moment, and it's effective in servicing that clientele. It's also got its hooks deep in the industry; last February, it forked over $150 million to Chrysler to be that car maker's preferred loan provider for the next 10 years.

So, Santander's vehicle lender looks like a good way to play a finance niche that's currently on the rise. It's not a stock for every investor, though -- keep in mind that much of its clientele is in that nonprime category. But for those willing to take on a little risk, a position in SCUSA could rev up the returns.

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