What happened
Shares of several credit card and consumer lenders rose this week, largely due to earnings reports that were received positively by the market.
For the week, shares of Capital One Financial (COF 3.55%) traded 11% higher as of market close Thursday, according to data from S&P Global Market Intelligence.
Shares of the online lending marketplace LendingTree (TREE -0.55%) traded 16.6% higher and shares of the small-dollar consumer lender World Acceptance (WRLD 1.12%) were up more than 35%.
So what
Capital One reported diluted earnings per share of $3.03 in the quarter on total revenue of more than $9 billion, both numbers that missed analyst estimates.
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Net charge-offs, or debt unlikely to be collected and a good indicator of actual loan losses, jumped by 54% from the third quarter. The 30-plus-day delinquency rate moved from 2.78% in the third quarter to 3.21% in the fourth quarter. Capital One also added about $1 billion to its allowance for credit losses.
Keep in mind that investors may have been preparing for this because coming into earnings, the stock traded cheaply and Capital One tends to lend to more subprime borrowers than its peers, which is a segment of the population that has seen its finances normalize the most so far in the cycle. More than 31% of Capital One's credit card borrowers had a FICO score below 660 in the fourth quarter.
World Acceptance, which provides short- and medium-term installment loans, also reported earnings this week. It generated diluted earnings per share of $0.98 on total revenue of $146.5 million. Earnings beat estimates for the quarter, while revenue came up short.
The company reported a high net charge-off rate in the fourth quarter of 25%, meaning it likely serves borrowers lower on the credit spectrum, but that rate is only slightly up from 23% in the third quarter of the year. The delinquency rate also fell in the quarter to 11.1%. World Acceptance has generated operating cash flow of more than $203 million over the last nine months, which is more than 21% higher than the same time period in 2021.
I didn't see any news regarding LendingTree but with the stock down more than 70% over the last year it might simply be rallying from earnings-related news of other similar companies.
Now what
Of this group, I really only like Capital One. The company has an experienced management team and I'm sure management will reserve conservatively regardless of the economic conditions to come this year. As the year progresses and interest rate hikes hopefully slow, the bank should be able to move its loan yields higher. The valuation is also not terribly demanding.
I do not have any interest in World Acceptance because I think the customer it serves could be more vulnerable to a recession, especially if unemployment rises more than anticipated.
I am also not terribly interested in LendingTree because I believe it's likely to see less demand in its marketplace due to the high interest rate environment.
