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OMF - OneMain Financial


ratiman
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OneMain is a subprime  lender that is the result of the merger of Springleaf and Citi's OneMain. Management believes that it can reach a run rate of $1.50 a quarter by third quarter of 2017, the stock is currently at $29.60. OneMain is majority owned by Fortress Investment, which bought Springleaf from AIG in 2010. The biggest competitive advantage of OneMain is that it is the only subprime lender with a national network of small branches to make face-to-face loans. OneMain has about $1.2B of tangible capital and expects to make around $600M in earnings this year, so the return on tangible equity is astronomical. As the company deleverages that will decline but it's still a very profitable business.

 

I'm not going to make an investment case for OneMain, I'll just post some of the more interesting highlights from the latest conference call:

 

On the very, very small data the company uses to make loans:

 

On the natural referral, it’s largely local merchants, it’s actually interesting in the communities we are in. And I talked about Zanesville and Peoria and all kinds of places, it’s really about the local branch in town on Main Street, First Avenue, wherever they are calling on the other local merchants in town and having them send business to that branch when they find customers that want to take on a service whatever it maybe plumbing or whatever is needed, auto repairs, funerals, weddings, etcetera and then that customer will get sent over. I would say it was recently rolled out across OneMain. It’s been very important across Springleaf for the last few years and drives a significant amount of our new business is actually one of the reasons why we find it so important to be local and have those relationships because you can never go do that on a national basis.

 

On why OneMain won't blow up in the next recession:

 

I would love to take that one. First and foremost I think we provide 20 years of historical data around credit on our asset-backed decks that are all up online. And I would encourage you and everybody else to go look at how we perform through not the last recession, but I would call it the last Great Depression, of 7 years, 8 years ago where I will speak to both companies, charge-offs were significantly lower than prime credit cards. And I can talk about the risk nature of both companies, but the local lending, the local collecting, the know your customer, the have collateral were all things that have for 100 years played into the DNA of each of these two companies. And the fact that one happened to have AIG as a parent and one happened to have Citi as a parent, it’s totally coincidental to the fact that both of these companies, through the branches and through the management teams are lenders by nature, collectors by nature and have lend through cycles and are more than prepared to lend and collect and adjust as the economy changes. So one of the reasons we are excited about our prospects, no matter the economy is the fact that we have done it, we have lived it and our numbers are there to back us up. And if you look at the volatility around our losses, I think they are better than any prime assets you will find and both the local nature as well as the fact that we have gotten collateral next to the loan have all made significant differences. So are we lending to a customer that is not going to get a platinum American Express card, yes. But we will lend to a customer that has a stable income, that has a paycheck and that generally wants to pay their credits, the answer is yes.

 

On deleveraging vs returning cash to shareholders:

 

Lee Cooperman

 

I look at the slide deck and I see that we are thinking in terms of the $6 run-rate in earnings by the third quarter of next year, stock is down 2, it trades under 5x earnings. You are targeting when property leveraged at 25 ROE, a 25 ROE shouldn’t sell under 5x earnings. You guys were brilliant in April of last year we sold stock at $51.50. The average price objective of the guys that cover you now is $41. When are we going to be in a position to take matters into our own hands and buyback cheap stock or pay a dividend out of our cash flow to shareholders, when is that the earliest date that, that would be possible?

 

Scott Parker

 

It’s a great question, Lee and thanks for the comment. Look, I would say we have targeted getting leverage to where we think is responsible to manage the company over the long haul, which is mid ‘18.

 

A dig at Lending Club and the other online lenders:

 

And we have sort of challenged some of the online lenders I think they can go deep, go deeper and try and to lend to this customer set. So it would be interesting to see how it all plays out. There are definitely a couple of people that have said they have been challenged with the credit metrics around going deeper to their model. And we are certainly hoping that as they have come to the conclusions of their experiments that they will find out that maybe appropriate for a super prime customer, but as you go deeper down, it’s a tougher thing to do without the kind of model that we have had with the balance sheet and the other things that we provided.

 

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