By Michael Kim
NASDAQ:CPSS
READ THE FULL CPSS RESEARCH REPORT
After the market closed on 5/12/25, Consumer Portfolio Services (NASDAQ:CPSS) reported 1Q25 earnings results. For the quarter, CPSS reported net income of $4.7 million, or $0.19 per share versus our $0.30 EPS estimate. Relative to our model, the EPS miss was mostly a function of less favorable revenue trends combined with higher employee and interest expenses, partially offset by lower-than-anticipated G&A and other costs.
After updating our model for 1Q25 actuals, we are lowering our 2025 and 2026 EPS estimates from $1.81/$2.89 to $1.17/$2.45. Our revisions primarily reflect a slightly flatter step up in revenues in light of more measured growth in loan originations combined with modestly less favorable margin assumptions – mostly a function of stubbornly high interest expense reflecting ongoing growth in securitization debt combined with a stable interest rate backdrop. That said, we note our 2026 EPS estimate represents 109% year-over-year growth, as revenue growth accelerates and operating leverage builds. Stepping back, we forecast rising risk-adjusted Net Interest Margins through next year, even as the NIM ticked down by 30 bps quarter-over-quarter in 1Q25, based on lower cost of funds (eventually), with our estimates assuming interest expense as a percentage of average portfolio balances (6.1% in 1Q25) tightens by ~50 basis points this year followed by a further ~70 basis points looking out to 2026. To be conservative, our model incorporates a cost of funds of 5.1% for next year, still above the company’s historical average of around 4.5%. Finally, we still see meaningful operating leverage driving outsized margin expansion reflecting existing infrastructure and management’s ongoing focus on extracting further efficiencies. Indeed, our model assumes operating margins (6.4% in 1Q25) approach 2022 run-rates (17.4%) over the next 18 months, while ROAs trend from 0.8% for the most recent quarter to 2.0% in 2026 (consistent with CPSS’s return on assets in 2022).
Turning to valuation, as a result of our lower earnings outlook, we are taking down our 12-month price target from $18 to $15 – still representing meaningful upside potential from current levels. Our model forecasts CPSS’s book value per diluted share to reach $13.03 by the end of 2025, with ROEs rising from a nadir of 6.6% in 1Q24 to 9.4% this year and closer to a more “normalized” 20% looking out to 2026 largely reflecting reaccelerating growth in loan originations and related finance receivables, as well as lower cost of funds. As the “Street” increasingly recognizes the company’s growth trajectory and underlying earnings power, we look for a meaningful upward revaluation for the stock, particularly given relative multiples.
To be sure, Price-to-Tangible Book Value and Price-to-Earnings multiples remain meaningfully higher across a subset of public companies with sizeable auto finance businesses. While we recognize most peer companies are significantly larger and more diversified, with considerable infrastructure, resource, and financial advantages, CPSS maintains a sizeable lead in terms of projected growth, thereby justifying comparable multiples, in our minds. Our $15 price target assumes the stock trades at ~1.2x current book value of $12.27.
We highlight the following key takeaways from 1Q25 results:
1. Still a loan growth story: The company’s total portfolio balance of $3.6 billion as of the end of 1Q25 increased by 3.5% compared to $3.5 billion as of the end of 4Q24 and 19.6% year-over-year. Loan origination volumes remain strong, with CPSS purchasing $451 million of new auto installment sales contracts in 1Q25 (with sequential improvements each month) compared to $346 million in 1Q24 – boding well for ongoing growth through the rest of this year and beyond. Looking ahead, our model calls for $1.9 billion of loan originations in 2025 followed by $2.1 billion next year, representing 12% growth rates for this year and next. Our optimism is primarily based on accelerating demand trends (rising applications per day), and increasing throughput from the company’s pass-through arrangement with Ally Financial (often a source of better-performing paper at lower client acquisition costs). In fact, senior officials remain focused on establishing incremental partnerships to widen the loan origination funnel. Additionally, we look for accelerating volumes, as salespeople hired in 2023 and 2024 continue to season, with senior officials still focused on hiring (at a more measured pace).
2. Funding capacity continues to build: On the funding side, CPSS recently completed the company’s 55th securitization by selling $420 million of asset-backed notes (with a weighted-average yield on the notes of approximately 5.96%) following the $442 million raised from the prior transaction in January – reinforcing investor demand for CPSS paper remains strong despite broader market uncertainty. Moreover, CPSS recently closed a $65 million securitization of residual interests from five securitizations issued from October 2023 through September 2024, thereby providing incremental capacity to fund loan growth.
3. Favorable credit lead indicators: The first quarter of 2025 marked a favorable inflection point for portfolio credit trends. To be sure, annualized net charge-offs represented 7.54% of CPSS’s average portfolio balance in 1Q25, down 48 bps from 8.02% in 4Q24 and 30 bps compared to 7.84% in 1Q24. Moreover, delinquencies greater than 30 days (including repossession inventory) accounted for 12.35% of the total portfolio balance as of March 31, 2025, down from 14.85% as of December 31, 2024. Looking ahead, unemployment rates (a key lead indicator for defaults) remain below historical averages, with only modest upticks forecast through next year. Next, management recently tightened underwriting standards, with an ongoing focus on credit, thereby paving the way for improving performance as 2025 loans vintage. Furthermore, problematic 2H22/1H23 loans continue to vintage (down to <30% of the total portfolio) and likely mostly rolling off by the end of this year, while newer/higher-quality paper accounts for a greater percentage of the mix.
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