PRG - PROG Holdings: Strong Growth Is Shown And A Buy Visible

2023-09-11 03:50:59 ET

Summary

• PROG Holdings saw a 76% increase in its bottom line on a YoY basis, with revenues of nearly $600 million.
• The company operates in the fintech space, offering financial solutions to consumers and retailers.
• Despite potential risks associated with its customer base and debt-raising initiatives, PRG continues to show strong growth and is rated a buy.

Introduction

The rise of interest rates seems to not be slowing down the business for PROG Holdings ( PRG ) at all as the bottom line saw an impressive 76% increase on a YoY basis alone. Revenues came in at just under $600 million and PRG continues to show why it's such a solid bet to get exposure to the consumer finance industry.

The company has continued to experience strong momentum and the last report proved just that as the company also raised the full-year outlook on the back of the recent performance. EPS is now expected to come in between $2.64 - $2.8 on a diluted basis. This doesn't in my opinion put PRG at an overvalued level as the growth is impressive and a slight premium to the broader sector based on earnings is justified. I like the business model and how PRG has been able to manage the last few quarters and will be rating it a buy for now.

Company Structure

The fintech space has gotten a lot of hype recently as many companies saw rapid expansion in both the top and bottom lines, and it doesn't seem like PRG is any different going of the results from the last report by the company.

PRG has emerged as a strong fintech holding company, offering financial solutions to both consumers and retailers alike. Operating across diverse segments, including Progressive Leasing, e-commerce, and in-store point-of-sale lease-to-own solutions, the company showcases a multifaceted approach to addressing evolving financial needs in today's dynamic landscape.

The recent strength the company has shown in the shape of top and bottom-line growth has resulted in PRG continuing its trend upward for the share price, yielding a return of 80% in the last 12 months alone. This hasn't yet put the company in what I would consider an overvalued place. The p/e is at a 15% premium to the select, but I would still consider the company a buy. PRG has shown a CAGR of revenues of nearly 20% in the last 3 years alone. The boom of fintech companies has been immense as major players like PayPal ( PYPL ) have also seen strong growth. But even though the demand has been increasing, it seems that it's sustainable for PRG at least. I would be happy to invest in the company at a p/e up to 11 or so, before considering it too expensive and applying a hold rating instead. One of the larger players in the BNPL space is Affirm Holdings ( AFRM ) for example. But when we look at the margins for AFRM it seems that PRG has come much further ahead in comparison. AFRM is yet to reach a positive net margin and it's instead a negative 62%. That is quite risky to invest in and makes PRG the superior choice in my opinion. Besides, AFRM has also historically been diluting shares quite heavily, almost doubling it in the last couple of years alone.

Earnings Transcript

From the last earnings call from the company, the CEO Steve Micheals had some valuable comments to share on the recent performance from the company and how the outlook right now is for them.

• “The strong customer payment behavior we experienced in Q2 as evidenced by our year-over-year 260 basis point gross margin expansion, improved write-offs of 7.1% and adjusted EBITDA growth of $22.8 million or 43.7% resulting in a 12.7% margin. Our write-offs for the first half of 2023 were 6.5%, keeping us on track to deliver another year within our targeted annual range of 6% to 8%”.

Seeing momentum in the consumer finance market even when interest rates are climbing is impressive. PRG is not a massive company with a market cap of just around the $1.5 billion mark. With margin expansion as well the company is further solidifying itself as a clear contender for more market share in the industry as well.

• “Our efforts to increase our e-commerce business are showing solid progress. We added nearly 4x the number of new partners in the first half of 2023 than we did in the same period last year, and the channel consistently contributes more than 15% of our total GMV. These new partners, along with upcoming e-commerce integrations with several existing retailers should contribute to our long-term GMV growth”.

With continued momentum in some of the smaller parts of the business, I think it's reassuring to see PRG be able to diversify itself and not fully rely on one segment to generate all the revenues in the coming years. I think this makes PRG less risky and puts them in a more appealing position and should have investors enticed.

Risk Associated

Having a business model that caters to customers with lower credit scores undoubtedly offers a competitive advantage to the company. However, it's important to acknowledge that this strategic approach also exposes the business to considerable risk, particularly during challenging economic periods. During such times, when adverse economic conditions prevail, customers in this category are more susceptible to defaulting on lease payments.

The slight decrease in operating expenses on a YoY basis as seen above though has been a nice touch as rising interest rates or sticky inflation hasn't put a wrench in the wheels of the business just yet. PRG has had debt levels of just under $600 million for a few years and this hasn't drastically increased the interest expenses for the business. The TTM amount was under $40 million and with the last quarter alone providing over $50 million in earnings I don't think the rising rates are a big issue for PRG. But if we anticipate that the rates will be falling in either the second half of 2024 or the first part of 2025, which I find likely, then we could add another $30 - $35 million to the earnings potential of PRG. For 2025 with an 8% YoY growth rate until then the company could generate upwards of $190 - $200 million in earnings. I think this is one of the appealing factors of the business right now, that once economic activity resumes, PRG could be a significant winner. That would in 2025 be an EPS result of around $3.9. With a 10x multiple to that we land at $39. This indicates an upside potential of nearly 20% from today's prices and if PRG continues buying back shares as they have done previously then the return looks closer to 25% instead by 2025.

During 2021, the company embarked on a substantial debt-raising initiative to facilitate share repurchases. However, a noteworthy point of consideration is that these repurchases were executed at significantly elevated prices. As a result, the anticipated reduction in outstanding shares fell short of expectations. This scenario highlights the intricate nature of managing share buybacks, especially when the acquisition costs are significantly higher than desired.

The slight decline in shares outstanding over the years I don’t think was the best of movies by the company. The long-term debts now sit at nearly $600 million which has meant that PRG pays around $38 million in interest expenses on a TTM basis. Thankfully the company seems to have bound the loans when rates were lower and the rising interest rates haven't yet fully materialized in the expenses. If rates stay elevated for a long time though, then that could perhaps prove to be a challenge for the business.

Investor Takeaway

The fintech space is riddled with a lot of non-profitable companies, but I think that PRG has managed to set itself apart right now as the revenues continue to grow and margins expand despite a higher interest rate environment. Buybacks continue as PRG is also generating strong cash flow from operations. This all concludes me right now rating PRG stock a buy.

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