Market Capitalization: $2.49B
Enterprise Value: $3.62B
Price: $50.06 (10/24/24)
What the Company Does
Formerly known as Alliance Data Systems, Bread is a consumer finance company that partners with retailers to provide private-label and co-branded credit cards and buy now/pay later products, along with retail credit cards and savings products provided directly to consumers. Some of Bread’s partners include Caesars, the NFL, Ulta Beauty, and Victoria’s Secret, to name a few, but the company focuses more on small-and medium-sized businesses that generally provide longer growth runways and better economics relative to its larger partners.
Why We Own It
Bread offers strong growth prospects and a compelling valuation with an experienced and highly capable management team. Although the company is facing near-term headwinds of rising loss rates on its customer loans and impending late-fee regulations, management is targeting a mid-to-high single-digit loan growth rate over the long term alongside returns on tangible common equity (ROTCE) in the mid-to-high 20% range (versus 21.8% in 2Q24). Additionally, management seems well-prepared for a challenging operating environment, as Bread has reduced its parent-level debt by nearly 62% since the end of 3Q21, boosted its common equity tier 1 (CET1) ratio by 270 basis points (bps) over the same period to 13.3%, which rivals the capital position of large banks, and hiked reserve rates to >12%, despite a net loss rate of <9%, implying a potential earnings per share (EPS) tailwind in the future if the economic environment does not significantly worsen from here.
The company has also developed a more diverse and stable funding base, as the company’s online direct-to-consumer (DTC) deposits have grown at a compound annual growth rate of 48% since the end of 2020 to more than $7B at the end of 3Q24, or 41% of total funding, compared to only 6% four years ago. Management is targeting a DTC deposit base that represents 50% of total funding in the future, which will help Bread reduce their reliance on more expensive funding sources (i.e. wholesale deposits and unsecured funding), which should ultimately result in a lower cost of capital. Management’s actions seem to be paying off, as Bread’s tangible book value (TBV) per share has nearly tripled between the end of 2020 and the end of 3Q24, with TBV/share currently standing at ~$47.48, implying shares are trading at a price/tangible book value (P/TBV) multiple of 1.05x, or a nearly 57% discount to peers (SYF, OMF, NNI, DFS, SLM, COF, SOFI, CACC, ENVA).
How Management Allocates Capital
Management’s top priority in the near-term is focused on tackling upcoming debt maturities while mitigating any negative impacts on their capital ratios due to current macroeconomic and regulatory environment (Consumer Financial Protection Bureau late-fee rule) headwinds, as they target a CET1 ratio of 16%+ over the long term. After meeting these obligations and investing in the core business, management will evaluate new growth opportunities, such as adding new partners to its network or potential acquisitions. If and when economic conditions improve, management will look to return more capital to shareholders in the form of share buybacks or increased dividends, with shares already offering a ~1.7% dividend yield.