In this piece, I evaluated two consumer financial services stocks, PayPal Holdings, Inc. (PYPL) and Regional Management Corp. (RM), to determine which of these is a buy, sell, or hold now. Based on the fundamental analysis of the stocks, I believe RM is an ideal buy now, while it could be wise to wait for a better entry point in PYPL.
Over the past two years, the financial services industry has demonstrated its ability to successfully navigate high levels of uncertainty. From insurance to investment management to real estate to banking, financial services organizations worldwide faced the COVID-19 pandemic with resilience and adaptivity. The industry has rapidly adopted advanced technologies to modernize traditional financial solutions.
For instance, businesses are making a significant transition to EMV technology. EMV chips and PIN cards provide a higher level of data security compared to traditional magnetic stripe cards. Furthermore, banks and financial institutions are increasingly adopting digitization to modernize the commercial lending business.
As a result, there is growing competition among banks and high demand for a simplified and quick commercial lending process. In addition, to pave the way for a contactless and highly efficient customer experience, financial services are increasingly looking into deep, new technology areas such as cloud, blockchain, meta-space, Web 3.0, fintech, embedded finance, and digital assets.
According to a report by The Business Research Company, the global financial services market is projected to reach $37.48 trillion by 2027, growing at a 7.5% CAGR. The fast-growing demand for digital financial solutions globally is expected to drive the market’s growth. Both PYPL and RM are well-known names in the financial services industry and should grow considerably in the foreseeable years.
RM is a clear winner in the price performance, with 19.8% returns over the past month compared to PYPL’s 3.3% gain. RM has gained 10.5% over the past three months, while PYPL plunged 13.2%. Also, RM’s 9.4% gains year-to-date are higher than PYPL’s decline of 10.5%.
Here are the reasons why we think RM could perform better in the near term:
Recent Developments
On April 3, PYPL and Live Nation Entertainment, Inc. (LYV) announced a multi-year strategic partnership that names PayPal as the Preferred Payments Partner of Ticketmaster, offering fans a simple and flexible way to buy tickets to the live entertainment they love worldwide.
Peggy Alford, EVP of Global Sales, PayPal, “Our data shows that U.S. consumers are nearly three times more likely to finish buying a ticket to a live entertainment event when they see PayPal as a checkout option, demonstrating the value the PayPal brand brings to this partnership.”
On March 23, RM commenced lending operations in Arizona, its 19th U.S. state, and expects to open its first brand within Arizona in the second quarter of 2023. The company’s measured expansion strategy enables it to deliver controlled, sustainable growth; and long-term value to its shareholders.
Recent Financial Results
PYPL’s net revenues increased 8.6% year-over-year to $7.04 billion in the first quarter that ended March 31, 2023. Its non-GAAP operating income was $1.60 billion, an increase of 19.1% year-over-year. In addition, the company’s non-GAAP net income rose 28.5% year-over-year to $1.33 billion, while its non-GAAP EPS came in at $1.17, up 33% year-over-year.
RM’s total revenue increased 12% year-over-year to $135.38 million for the first quarter that ended March 31, 2023. Its interest and fee income grew 11.9% from the year-ago value to $120.41 million, mainly due to higher average net finance receivables and its insurance income, net rose 3.9% year-over-year, driven by portfolio growth. Its total assets were $1.70 billion, up 13.6% year-over-year.
Past And Expected Financial Performance
Over the past three years, PYPL’s revenue and EBITDA have grown at 15.4% and 17% CAGRs. The company’s net income has increased at a 13% CAGR over the same time frame, while its EPS has grown at a 14.3% CAGR. In addition, its total assets have increased at a 12.5% CAGR over the same period.
Analysts expect PYPL’s revenue and EPS for the fiscal year (ending December 2023) to increase 7.5% and 19.6% year-over-year to $29.58 billion and $4.94, respectively. For the fiscal year 2024, the company’s revenue and EPS are expected to grow 8.9% and 14.8% from the previous year to $32.23 billion and $5.67, respectively.
RM’s revenue has grown at a 12.5% CAGR over the past three years. Over the same period, the company’s net income and EPS have increased at CAGRs of 3% and 9.4%, respectively. Its total assets have grown at a CAGR of 16.4% over the past three years.
For the fiscal year ending December 2023, RM’s revenue and EPS are expected to increase 6.1% and decline 18.5% year-over-year to $538.12 million and $4.49, respectively. Also, analysts expect the company’s revenue and EPS for the fiscal year 2024 to grow 9.1% and 43.1% year-over-year to $586.85 million and $6.43, respectively.
Profitability
PYPL’s trailing-12-month revenue is 55.3 times what RM generates. However, RM is relatively more profitable, with a trailing-12-month gross profit margin and EBIT margin of 60.22% and 18.29% compared to PYPL’s 41.73% and 15.87%, respectively. RM’s trailing-12-month EBITDA margin of 20.96% is higher than PYPL’s 18.84%.
Furthermore, RM’s trailing-12-month Return on Assets (ROA) of 5.73% compared with PYPL’s negative 6.54%.
Valuation
In terms of trailing-12-month P/E, RM is currently trading at 8.52x, 68.3% lower than PYPL, which is trading at 26.91x. RM’s trailing-12-month Price/Sales multiple of 0.54 is 79.2% lower than PYPL’s 2.59. Likewise, RM’s Price/Cash Flow of 1.23x compared to PYPL's 12.29x.
Thus, RM is relatively more affordable.
POWR Ratings
PYPL has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, RM has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. PYPL has a grade of C for Value, consistent with its mixed profitability. PYPL has a trailing-12-month ROTA of 3.50%, 212.3% higher than the industry average of 1.12%. However, the stock’s trailing-12-month gross profit margin of 41.73% is 27.9% lower than the 57.92% industry average.
RM, on the other hand, has a grade of B for Quality, in sync with its higher-than-industry profitability. RM’s trailing-12-month gross profit margin and ROA of 60.22% and 1.95% compared to the industry averages of 57.92% and 1.12%, respectively.
Of the 47 stocks in the Consumer Financial Services industry, PYPL is ranked #13, while RM is ranked first.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Value, Growth, and Sentiment. Click here to view PYPL Ratings. Get all RM ratings here.
The Winner
In recent years, the financial services industry has witnessed significant adoption of efficient and advanced technologies to modernize traditional financial institutions. Amid the growing demand for digital financial services, the industry is well-positioned for solid growth in the long run. Given the industry tailwinds, financial services stocks PYPL and RM should grow substantially in the upcoming years.
However, PYPL’s relatively low profitability, stretched valuation, and weak momentum make its competitor RM the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Consumer Financial Services industry here.
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PYPL shares fell $0.29 (-0.46%) in premarket trading Tuesday. Year-to-date, PYPL has declined -10.52%, versus a 13.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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