fintrustbrokerage)services regional)managementcorp.)(rm...

Regional Management Corp. (RM)Fintrust Brokerage Services

Equity ResearchRegional Management Corp. (RM)February 13, 2014

1 Fintrust Brokerage Services www.Fintrustadvisors.com 124 Verdae Blvd, Ste. #504 864-288-2849 Equity Research Greenville, SC 29607

Company Summary: RM is a fast growing diversified consumer lender with $512 mm in finance receivables, up 29% over the last year. RM provides cash, auto financing and furniture and appliance installment loans to customers with limited access to consumer credit. Loans are sourced through company branches, direct mail, auto dealerships, online credit application networks, and furniture and appliance retailers. Loans range from $300 to $27,500. All loans, regardless of origination channel, are serviced and collected through 264 company branches enabling frequency contact with customers.

Fintrust Recommendation

Fintrust Rating: BUY Target Price: $40.41 Current Share Price $33.63Expected Return 20.1%52 Week Price Range $36.23 - $16.20

Fintrust Brokerage Services, LLC rates companies a BUY, HOLD, SELL, or SHORT.

· A BUY rating is given when the security is expected to outperform the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

· A HOLD rating is given when the security is expected to perform in line with the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

· A SELL rating is given when the security is expected to perform below the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

· A SELL SHORT is given when the security is expected to decline in value over the next year.

The distribution of ratings across Fintrust’s entire company universe is _50_ %Buy, 50 %Hold, _0_ %Sell, _0_ %Short

Key FiguresKey figures pricing data reflects previous trading day’s closing price. Other applicable data are trailing 12-months unless otherwise specified.

Debt/Capital Ratio 69.0% Return on Equity 21.0% Net Margin 17.0% Payout Ratio n/a Revenue (000’s) $171,100 Net Income (000’s) $29,400 Shares Outstanding (mi) 12.9 Shares Short (mil) nmf Market Capitalization ($ mil) $421.62 Enterprise Value ($ mil) $761.20 Beta 1.24x

Valuation

Price/Book 2.82xBook Value/Share $11.90 EPS (12A) $2.12EPS (‘13E) $2.28EPS (‘14E) $2.76P/E (12) 15.8xP/E (13) 14.8x P/E (14) 12.2xEst. 2014-2020 CAGR 17.00%

Industry: Financial ServicesGICS Sector: Financials Sector (GIC Code: 40)

Please see pages 16 and 17 of this publication for important certification and disclosure information

Analyst Notes:Analysis by Bruce Robert (917) 701-3357 & Allen Gillespie, CFA (864) 288-2849

• We are initiating coverage of RM with a BUY rating for risk tolerant investors only and a $40.41 target price, representing 20.1% upside, as we estimate that RM shares are attractively valued. based on our Dividend Discount Model. At $40.41 shares would trade at 12.6x our 2015E EPS. The shares currently trade for 12.2x 2014E EPS.

• We are recommending the purchase of RM to risk tolerant investors, with a couple of caveats. On the positive side (1) longer term, we like the fact that Regional is a participant in the auto financing business, an unconsolidated industry with vast potential and (2) that Regional will likely continue to quickly grow its largest business – small installment loans. On the flip side, current headwinds in auto lending and the consequent heavy reliance on small loans for overall growth means the company is in a transition phase. Other risks include declining economic vibrancy for the company’s sub-prime target market, increased competition, maintaining credit quality standards during rapid growth in combination with high branch employee turnover, special risk associated with the company’s live checks program, and risks related to regulation including terms of loans, fees, loan amounts, interest rates, collection and disclosure practices.

• Regional’s $512 million loan portfolio is comprised of small installment loans (50.1% of total), auto loans (35.5%), large installment loans (8.4%) and retail loans (6.0%). We estimate that Regional’s diversified loan portfolio and inclination to make higher quality / lower yield small loan credits (as compared to payday and other installment loan providers) provides a degree of insulation from regulatory scrutiny and competition in any single loan category.

• While we estimate that Regional’s auto lending business is solidly profitable, growing competition in the subprime ‘space’ is being stoked by (1) increased post recession bank appetite for subprime auto loans and (2) very strong investor demand for asset

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Analyst’s Notes....Continued

Investor Summary

While we are enthusiastic about the lender’s strong rates of growth in sales and receivables, its portfolio diversity and the significant long term potential afforded by auto purchase lending, there are several issues that confront the company at this time. Its core growth and value drivers – small installment lending and auto purchase lending - are in a state of transition.

• In the case of small loans, we estimate that a rapidly growing portion of small loan origination comes from live check borrowers. We have 4 issues with respect to this trend: (1) for strategic marketing purposes the company won’t reveal exactly how much of small loan origination comes from this channel, which makes it difficult for us to judge the impact and value of this channel on the overall company (2) while credit card companies engage in mass mailings of offers to open lines of credit, we don’t know how the Consumer Finance Protection Bureau will view such mailings to low income and asset poor borrowers as it undertakes a more extensive investigation of the installment lending industry (3) we very roughly estimate that live checks have grown to the point where they are responsible for 40% to 50% of the company’s entire loan portfolio growth, which means that a significant driver of value for Regional shareholders is based on an operation for which limited data and statistics are available with which to evaluate and (4) risks associated with live check v. branch originate loans are higher. Still, to the company’s credit, none of these issues mean that the program won’t prove to be a huge success.

• Auto lending comprised 35.5% of the company’s total receivables at 3Q 2013, and we estimate generated some 23% of interest and fee income in the latest quarter. The company has deftly expanded beyond the so-called ‘direct’ auto lending market place to do business with franchise auto dealers where loans are closed at the dealership, a strategy that opens a path for Regional to more fully engage in the newer used car and new car markets. Subprime auto lending is a very vibrant market. On the other hand this vibrancy is attracting much larger participants including banks and large player

backed auto subprime securities, driving falling yields and modest auto loan credit quality deterioration. On y-o-y basis, in 3Q 2013, auto loans charge offs grew 27%, while auto yields dropped to 20.4% in 3Q 2013, down from 21.6% in 2012. Competition is also impacting auto receivables growth, as management wisely avoids diluting its portfolio with auto credits featuring falling yields.

• To enhance companywide loan growth and yield, Regional is rapidly expanding its small installment loan portfolio, which generates the company’s highest yields (44.4%). Powering the growth is a program wherein the company sends credit-screened ‘live’ checks to prospective eligible borrowers, who, upon depositing the checks, ‘enter’ into a loan with Regional. In 2012, live checks accounted for 51.1% of total small installment loan origination, and based on management commentary we conclude that the majority of small loan origination in 2013 came from live checks as well.

• The program is very effective. Total companywide receivables growth has increasingly been driven by small installment loans; in 3Q 2013, while small loans equaled just 50% of the company’s total receivables, y-o-y growth in small loan receivables represented 85% of the y-o-y growth in Regional’s total finance receivables.






Industry Background

The Generic Sub-Prime Market: There is considerable potential demand for the company’s products. Tightened credit requirements imposed by banks, thrifts, credit card companies and other traditional lenders that began during the recession have limited the supply of consumer credit for the large audience of nonprime borrowers. According to Equifax, in a report indicating that the number of sub-prime consumers grew steadily from 2007 to 2012, there were 48 million consumers with credit scores below 620 as of the 3rd quarter of 2012. Regional and other installment loan lenders not only enjoy a large audience, but serve a practical purpose. According to the Corporation for Economic Development (January 2014), 44% of US households are ‘liquid asset poor’, meaning they have less than 3 months worth of savings. If a liquid asset poor family faces an unforeseen expense, such as a broken down car or a medical bill, they have to borrow to cover the tab, and installment loan lenders fill this niche very well (note: all but 1 of the 10 states with the worst liquid asset poverty are in the South, which is where Regional’s customer base is predominantly located). As Regional’s management tells it - their customers are generally hourly wage earners whom are “always in a state of recession” and “underemployed disproportionately.” Lastly, demand should remain intact: in a December 2013 report by Wells Fargo Securities, their economists indicated that that current hiring rates suggest that it will be more than 4 years before the U.S. returns to pre-recession levels of full time employment.

such as Santander Consumer USA, resulting in very stiff rate competition. This is, sensibly, giving management pause as it smartly avoids chasing yield diminishing deals. As a result, Regional’s auto loan growth is ‘stalling’.

• Lastly, based on our earnings model, we estimate that RM trades for a very attractive 10.5x multiple on 2015E EPS, which is a very attractive multiple given that the company is likely to enjoy 15% to 20% growth for the next several years. With a steep growth curve ahead, however, the company is not likely to generate free cash flow anytime soon, and may turn to the equity markets to fund its expansion. There’s always a chance that the value created by placing the shares in more investors hands may be overshadowed by the potential dilutive effect of an offering.

We have high regard for management, the company’s businesses and its high growth prospects. Nonetheless we believe that the greatest near term challenge facing the company is the stall out in its auto lending business and consequent dependence on small loans for growth. However, for those investors with high risk tolerance, the shares present an attractive long term investment opportunity.








• Subprime debt has lower credit quality. In 3Q 2013, Regional’s annualized charge off rate as a percentage of period ending loans receivables was 6.4%. In contrast the annualized charge off rate for consumer loans at commercial banks in 3Q 2013 was 2.1%, according to the St. Louis Fed.

We like to characterize Regional as a subprime lender operating in 3 subprime sub segments (1) small installment loan lending (2) subprime auto lending and (3) a third category that is inclusive of Regional’s large and retail loan lending. Since Regional’s large installment loan and retail loan receivables combined have not grown in 6 quarters and account for a small percent of total receivables, we estimate that the company’s small installment loan and auto loan operations are the key drivers of value creation at this time.

Small Installment Loan Market: The non-depository installment loan consumer finance industry is highly fragmented. There are approx. 8-10,000 installment lending branches in the U.S. and the majority of operators have 100 or fewer branches. RM has 264 branches, which makes Regional, management estimates, the 5th or 6th largest operator of an installment lending branch network. World Acceptance Corp. (WRLD, $89, HOLD), one of the largest, operates over 1,200 branches. Installment loan consumer finance companies generally charge high interest rates and fees to compensate for high rates of delinquencies and charge-offs and to cover the high cost of underwriting which we estimates does not vary significantly by loan size. Because lenders can charge the same level of fees associated with initiating and maintaining an installment loan regardless of the loan size, smaller loans generally carry higher effective APR rates. We estimate that RM generates a 51% APR on its small installment loans (WRLD, on the other hand, generates small loan yields in excess of 60% in part because its typical loan is 25% smaller than Regional’s). Consumer loan offices are licensed and monitored under state laws, which, in many states, establish allowable interest rates, fees and other charges on small loans made to consumers and maximum principal amounts and maturities of these loans. Changes in state regulations can have a dramatic impact on RM, and can increase the volatility and uncertainly with respect to predicting the company’s future results.

There is no lack of negative press on the installment loan industry. We estimate that some of the criticism of the industry is due to a misperception that the installment industry and the payday industry are one and the same. Payday loans average $350 and are payable in 2 weeks or less and are vastly more expensive. According to the Consumer Financial Protection Bureau (‘CFPB’), which recently concluded an extensive investigation of payday lenders, payday loans can have APRs of over 500%. While the CFPB is expected to undertake a similar examination of the installment industry, and particularly larger players such as RM, we estimate that the CFPB is focused on enforcing the payday sector for now. As well, we think the results of such an investigation could yield more benign conclusions. Nonetheless, as it focuses on the installment loan industry, it should be noted, the CFPB has the ability to (1) re-define acceptable practices which could adversely impact how RM conducts its businesses and (2) establish penalties for non compliance.

Subprime Auto Lending Market: The overall auto lending business, including subprime, is robust. According to the Federal Reserve in 3Q 2013 quarterly auto originations - $97.4 billion - reached their highest level since 3Q 2007. Furthermore, according to Experian, at 3Q 2013 total auto loans stood at $783 billion, up 15% y-o-y. During the recession the subprime auto lending market plummeted, and has been recovering at a steady pace ever since: According to Experian, borrowers with credit scores below 680 received 26% of car loans in 3Q 2013, while midway through 2009, the share of non prime loans was just 18% of vehicle financing.

Based on Experian’s data, we estimate that subprime loans outstanding stood at $155.8 billion (19.9% of total auto loans), and that subprime loans increased 14.2% y-o-y. In 3Q 2013, Regional’s auto loans receivables advanced 13.1% over last year, to $181.6 million (0.1% share). While the auto subprime market is not frothy (non prime borrowers still make up a smaller percentage of all borrowers than they did during the recession), two factors give us pause. First, participation in the subprime auto segment has increased dramatically putting downward pressure on rates, particularly on loans made to franchise dealers, and secondly, there are indications that auto loan credit quality is declining marginally. Instead of chasing low rates and softening its auto underwriting standards, to its credit Regional’s management is holding fast and expects very modest auto loan growth in 2H 2013. We’ve included some observations on the auto lending market to substantiate the consensus view of higher competition and falling credit quality.

1. Banks are actively expanding into subprime auto lending. Fitch Ratings recently noted that in 2Q 2013 banks extended about 36% of all subprime auto loans, a 200 basis point y-o-y increase

2. Loan-to-Value (LTV) ratios for used car non prime borrowers have recently climbed 2-300 basis points y-o-y, according to Experian Automotive (3Q 2013). Climbing LTV ratios can be a symptom of falling rates and stretched valuations in a competitive environment. Higher LTV ratios are a credit concern because higher loan advance rates generally lead to lower recovery values upon repossession of a vehicle if an obligor defaults.

3. S&P reports that 72 month subprime loans are becoming more prevalent in contrast to 60-month loans, which can be sign of weakening credit standards.



1.2.3.4.5.6.7.8.9.10.11.12.





4. On its most recent conference call, Capital One’s management (COF, $35, NR), the 8th largest car lender, recently characterized the subprime market as stable but that rates are slowly falling and that used car values are softening, which could lead to climbing charge off ratios and expense. COF executives see a recent, modest reversion to higher loss rates in their subprime auto lending unit.

5. Activity in the US Auto ABS market is reflective of some deterioration in the subprime market. According to the S&P US Auto Loan ABS Tracker (December 2013), “subprime performance has continued to weaken throughout 2013”, as evidenced by (1) hastening monthly net loss rates (2) softening in recovery rates and (3) rising 60+ day delinquencies, up approx. 31% in November 2013 from last year.

Competitive pressures impacting loan growth and credit quality, as it affects Regional’s auto lending business, is reflected in the following chart

Regional Management

Regional is a diversified subprime lender with major small installment loan and auto purchasing loan divisions. In the small installment loan arena, the company, we estimate, makes loans to both subprime and deep subprime borrowers, while based on its auto portfolio yield, we estimate the company’s auto loans are substantially made to deep subprime borrowers. The company’s business model is in part distinguished by its unique branch cross-selling strategy.

Branch Strategy: RM sources loans through its 264 branches as well as through more than 3,400 automobile dealerships and 800 furniture and appliances retailers that partner with RM. The company’s strategy is to rapidly open new loan branches and augment branch-originated receivables growth through loans originated by auto dealers, retailers and the company’s ‘live check’ direct mail campaigns. Branches service loans made at the branch itself and those made at nearby auto dealer and retail locations. Live checks are mailed to every zip code within a 15 mile radius of a branch location. New branch openings serve to attract relationships with new walk-in borrowers as well as with surrounding auto and retail locations. Loans not originated at a branch are approved by a centralized underwriting team. After closing, all loans are serviced at the branch location, which affords RM greater control over loan portfolio performance (70% of all loan payments are made in person at a branch). RM estimates that it can open 800 more branches over time, which would eventually put its total branch count at roughly the same as WRLD.






Analyst’s Notes....ContinuedAnalyst’s Notes....Continued

Small Installment Loans: Small installment growth is powering overall results. In 3Q 2013, y-o-y small installment receivables grew 62% (versus 46.1% in 2012) while large installment loans declined 18%, auto purchase loans grew 17%, and retail loans grew 18%. Compared to the same quarter last year, the dollar amount in loans originated declined in all loan categories except small loans (put differently, in 3Q 2013, RM generated $60 million more in loan originations versus 3Q 2012, while small loan origination came to $71 million). The direct mail strategy is powering this growth.

Live Checks – Since 1998, RM has been sending customers checks in the mail which turn into a small installment loan if the customer deposits the check. The company’s branch infrastructure anchors the live check program; there are 7,000 zip codes within 15 miles of the company’s 264 branches into which the company sends checks. The company uses a combination of its own underwriting criteria and 3rd party-supplied credit information to target customers. The charge off rate for live checks is similar to small loans made by ‘walk ins’; the higher credit rating of live check targets is offset by the loss of underwriting information provided by branch ‘walk-in’ applicants. The program has exploded in size: the company has indicated that it sent some 3 million mailings in 2013; up from 55,000 in 2007.







For competitive reasons management is reluctant to specify how much small loan origination in the nine months of 2013 came from live checks, although the company did tell us that without live checks its ‘walk-in’ small loan volume growth would be at least equal to the rate of branch growth. We would estimate that live checks accounted for as much small installment loan origination in the nine months of 2013, as it did in 2012, that is, 50.1%. In the nine months of 2013, there was $468 million of small installment loan origination and $639 million of total loan origination. At the assumed rate of 50.1% live check origination / total small installment loan origination one would very roughly surmise that live checks represented 37% of Regional’s total loan origination in 3Q 2013, and 48% of sequential incremental loan receivables growth in the quarter.

1.Automobile Purchase Loans: RM makes automobile purchase loans of up to $27,500, which are secured by the purchased vehicle, with terms of between 36 and 72 months. Auto loans are offered through a network of dealers in the company’s geographic footprint including over 2,000 independent and approximately 1,200 franchise automobile dealerships. The loans include both direct loans, which are sourced through an independent (‘mom and pop’) dealership and closed at one of the company’s branches, and indirect loans, which are originated and closed at a franchised dealership and which represent newer vintage used cars and new cars. About 55% of Regional’s auto receivables come from the direct channel and fully 100% of these loans are for used cars. Franchise dealers only originate indirect loans and thus the company directly competes with numerous financing alternatives including banks, captive financing arms and credit unions (the top 20 indirect lenders account for 35% of the U.S. market). Hence, the indirect market affords Regional less discretion in setting APR rates and indirect rates are substantially lower than direct rates generated by RM (17.5% versus 24.5% for direct loans). On the positive side, indirect loans have lower charge off rates.

2.RM entered the direct, used-car only auto lending market in 1998, and expanded into the indirect market in 2010. At that time, the indirect market presented an opportunity for RM to offset the loss of about 25% of mom and pop auto dealerships due to the recession. The company is planning to become a larger participant in the higher quality used car and new car market through the company’s relationship with franchise dealers, but as management has indicated to us, RM will not sacrifice loan yield and its underwriting standards to do so.







Recent Results: Regional’s branch count, sales and receivables outstanding have been growing quickly for quite a while. More recently, receivables growth has increasingly emanated from small loan growth, while in 3Q 2013, net income growth was negatively impacted by competition-induced falling yields, and an increase in auto related provision for loan losses.

From 2008 – 2012 the company’s finance receivables, branch count and revenues grew 23%, 19% and 29% per year. Revenues grew more quickly than branches due to the company’s entrance into the indirect auto lending market, and an ever-expanding small installment live check direct mailing program. Gross loan originations from live checks reached $223.7 million in 2012, growing 44% a year since 2008. Furthermore, live checks represented 51.1% of small installment loan origination in 2012.

In 3Q 2013 revenue was $44.5 million, and net income was $7.6 million (17.1% of sales). EPS advanced 7.3% to $0.59, while the share count rose 1.2%. Same store sales grew 16.1%, a relatively high rate of growth. WRLD, for example, just reported 6.1% same store sales growth. WRLD has a much more mature branch structure. We estimate that ~ 58% of RM branches are less than 5 years old, while ~ 20% of WRLD branches are that young. On a y-o-y basis, branch count, sales, receivables and net income grew 23.4%, 25.3%, 29.0%, and 12.9%, respectively. Sales and net income growth lagged receivables growth due to heightened auto lending competition and the expansion of the live check program which targets more credit worthy borrowers and hence generates lower yields. The average yield on all loans was 32.4% down from 33.4% last year. Net income growth was also impacted by a 56% y-o-y increase in the provision for auto loans losses. While net income lagged, in general the company is positioned to extract greater economies of scale as it expands due to an increase in efficiency ratio: in the quarter, personnel costs as a percentage of finance receivables dipped to 7.8% from 9.2% last year.

Corporate History and Governance:

• RM began operations in 1987 with 4 branches in South Carolina. RM now operates in 8 states. In 1998, RM started offering direct auto loans. In 2008, RM launched its live check program. In 2009, RM began writing Retail Purchase loans and Auto loans online. In 2010, RM entered the indirect auto lending arena. On 4/2/12, RM closed IPO at $15/share. In 4Q 2013, RM sold 5.8 million shares on behalf of insiders in 2 tranches of $27.50 and $31.

• Due to its Secondary offering, Regional is no longer a ‘controlled; company and therefore has until 9/25/14 to populate its compensation, corporate governance, and nominating committees with independent directors, and ensure that a majority of the Board is independent. Until then, shareholders do not have the same protections available to shareholders of NYSE companies that are now subject to these conditions.

• There are anti-takeover provisions that make the acquisition of Regional more difficult including (1) the potential issuance of super voting preferred stock and (2) a provision that requires over 80% of shares entitled to vote to amend company bylaws.







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! Financial Strength: Although not excessive, the company’s debt / equity ratio, which is currently 2.4 xs, is unlikely to shrink anytime soon. The lender is significantly free cash flow negative and is poised to continue its current high rate of loan growth for the next several years. Over the 2014 – 2020E timeframe we forecast $814 million in cumulative cash from operations, and $1,374 million in net originations of loans receivables, suggesting that the company will need to raise $560 million in external financing over the next 6 years. Regional is currently using $347 million of its $500 million R/C for which the company currently pays Libor + 3%. The company has several options: the company is working with Wells Fargo to securitize approx. $100 million of its debt through the auto ABS market, a transaction which would close midyear, at the earliest, and provide the company with the ability to tap multiple sources of funding. It can arrange to increase the size of its R/C, and depending on the company’s assessment, it may also seek to access the equity markets if, for example, the company’s growth rates exceed its current pace, and/or it finds large acquisition opportunities.

Earnings and Growth Analysis: The Company has several ‘levers’ to perpetuate its high rate of growth. Its (1) at the early stages of branch deployment (2) with an upcoming serial securitization program, the company is set to supercharge its indirect auto lending business if and when competitive conditions permit, and (3) management believes it has just ‘scratched the surface’ in the live check arena. In 2H 2012, live checks and strong auto loan growth enabled the company to post 29% revenue growth and 19.4% net income growth in 2012 (EPS declined due to going-public share issuance). We foresee 26% top line growth in 2013, driven by a mixture of tepid auto growth / rapid small loan origination. However, we envision just 16% EBIT growth due to a boost in auto loan reserves. We estimate single digit net income and EPS growth in 2013, as interest expense climbs 43%. In 2014, we estimate that sales and EPS will climb 23% and 21% and that the provision for loan losses could remain ‘sticky’ at 23% of revenues as auto competition increases. Our $2.76 EPS estimate is below consensus which stands at $2.97 (and suggests 25% y-o-y EPS growth). Our model estimates that ROA and ROE remain steady reflecting our estimation that profitability holds steady. We expect that economies gained by increasing scale may be offset by potential diseconomies due to costs to support target market diversification.

2014E – 2019E: We see long run CAGR of 16% to 18%. Our long term model and Dividend Discount Valuation are based on conservative assumptions given Regional’s early stage of expansion.






Peer Analysis: World Acceptance Corp. and Springleaf Holdings LLC are two publicly traded subprime lenders that compete with Regional based on product, rates and geography. Founded in Evansville, Indiana in 1920, Springleaf Financial Services provides loans and other credit related products to more than half a million families in 26 states, Puerto Rico and the Virgin Islands. LEAF provides bill consolidation loans, personal loans, home improvement loans, and loans for unexpected expenses and vacations.

WRLD is Regional’s most direct competitor (1) Regional was founded by executives that came from WRLD (2) both are headquartered in South Carolina (3) each has similar financial operating characteristics insofar as they generate very similar EBT and net income to sales ratios and share similar funding strategies and (4) we estimate that at least 58% of WRLD and Regional’s operations overlap in 6 states. While World is a mono line carrier – providing just installment loans – their competition is becoming intensely fierce as Regional makes a big push into World’s ‘territory’ with its massive live check campaign and Regional’s determination to increase overall loan yield by being a bigger player in the higher yielding small loan market.

World is a much larger lender than Regional and hence even though they are both opening 50 or so offices a year, World’s growth rate is a 3rd that of Regional’s. Based on our conversations with World executives, we don’t believe that the company is planning on having its own live check program, and is content to grow its small loan business at a steady pace, which it has been doing since it began in 1962. Neither carrier is prone to comment on the other’s operations and their potential competitive impact on each other.

In the auto realm, the car financing market is highly fragmented. RM competes with national and regional banks, credit unions and others. Last month, a very large auto lender focused on the non prime (mostly) used car auto lending segment, Santander Consumer USA (SC, $25, NR), with $21 billion in loan assets, went public. SC does business with over 14k dealerships. Due to its large operation, SC generates higher EBT margins than RM, an edge that emanates from significant G&A scale. Santander’s efficiency ratio (G&A / sales) hovers in the 20% range versus 40% for RM which likely provides larger lenders such as SC more pricing flexibility, as does their ready access to the securitization market for funding.

Valuation Analysis: Because we don’t forecast positive unlevered FCF throughout our forecast period, we employed a 2-stage Dividend Discount model to value RM. That model assumes 3.75% perpetuity growth in the 2025 out year, and 10.10% cost of equity in the out year, as well. The derived one-year price target - $40.41 – comes to 12.6X our 2015E EPS estimate, which is reasonable insofar as we forecast 16% 2014- 2015 EPS growth. This suggests an expected return of 20%.

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Recommendation: We recommend a BUY of RM shares for risk tolerant investors. The central investment thesis is that (1) the company has a diversified loan portfolio that can enable the company to grow if any single loan segment falters (2) while the auto lending market is currently in a ‘pause’, the market is quite large and presents a long term growth opportunity for the company (3) that the company is in the midst of rapid growth in branches and receivables and its shares trade at a formidable discount to our one-year price target. Risks include regulatory action, competition in the auto lending market and the need for significant external funding over time. We recommend that investors refer to the company’s latest 10K filing for a more detailed list of other potential risks.





Important Disclosures


Analyst Certification: We hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company and its securities. We also certify that we have not, will not, nor are presently receiving direct and/or indirect compensation in exchange for any specific recommendation in this report. In addition, said analysts have not received compensation from any subject company in the last 12 months.

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An analyst or a member of his household may not purchase the securities of a subject company 30 days before or 5 days after the issuance of the research analyst’s report or a change in ratings or price targets, trade inconsistent with the views expressed by the research analyst, and all transactions in the subject company (ies) securities for the research analyst’s personal trading account must be approved.

The research analyst nor a member of his household own any of the securities of the subject company including any options, rights, warrants, futures or long or short positions. Neither the research analyst nor a member of his household own 1% or more of any of the securities of the subject company based upon the same standards used to compute beneficial ownership for the purpose of reporting requirements under 13(d) of the Securities Act of 1934, as amended.

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The firm has no knowledge of any material conflict of interest involving the company mentioned in this report.

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The firm does not engage in investment banking activities.

The subject company (ies) has not been a client in the past 12 months preceding the date of distribution of this research report and is not currently a client. The firm has not received non-investment banking compensation for products or services or other non-securities services from the subject company or any affiliated company.

The research analysts at the firm do not receive any compensation based on investment banking revenues and may be paid a bonus based upon the overall profitability of the firm.

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The firm has not managed or co-managed a public offering or received investment banking compensation in the past 12 months regarding the subject company (ies).

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Important Disclosures


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