Credit Corp (ASX: CCP) is a dividend-paying stock that has been a bit of a head-scratcher for investors lately. Despite strong fundamentals and a solid track record, the market seems to have missed the boat, leaving the stock trading around 18% below its pre-first-half result price. This discrepancy raises an intriguing question: What's the story behind Credit Corp's underperformance?
A Snapshot of the First Half
On February 3rd, Credit Corp released its first-half FY26 results, which initially sent the stock tumbling 16.7%. The market's reaction was understandable, given the following:
- Revenue Beat Expectations: Up 4% to $283.6 million, surpassing estimates of $277.5 million.
- Net Profit Miss: Flat at $44.1 million, falling short of the expected $48.9 million by 10%.
- Dividend Stability: The interim dividend remained at 32 cents per share, year-over-year.
However, a closer look reveals a more nuanced picture. Credit Corp's US arm demonstrated impressive growth, with collections up 23%, productivity up 41%, and payment arrangements book up 5%. The AU/NZ loan book also showed strength, with a 7% increase in loan volume and a record half-year for lending.
The Market's Reaction: Glass Half Empty?
The market's initial negative response can be attributed to concerns about the heavy lifting required in the second half to meet full-year guidance. This led to speculation about potential guidance downgrades, causing the stock to drop 16.7%.
However, Credit Corp's resilience shone through. On May 7th, the company reaffirmed its full-year guidance and even upgraded its gross lending outlook to $420-430 million, resulting in a 7.9% stock rally on the day.
The Valuation Puzzle
From a valuation perspective, Credit Corp appears attractively priced. The stock trades at a trailing price-to-earnings ratio of 8.5x, which is relatively undemanding. Macquarie's forecasts predict low-teens revenue growth and net profit growth in the high single digits to low teens over the next two years, with a dividend yield of 6-7%.
Navigating the Risks
Despite its strong fundamentals, Credit Corp faces ongoing challenges. Rising competition in the US is a concern, and the overhang from the Humm acquisition (with a non-binding indicative offer outstanding) adds uncertainty. The market's current pricing seems to reflect a lack of confidence in the company's ability to navigate these risks.
The Way Forward
Credit Corp's story is one of resilience and potential. While the market's initial reaction was understandable, the company's ability to reaffirm guidance and upgrade its outlook demonstrates its commitment to meeting expectations. The current valuation presents an opportunity for investors to capitalize on the company's strong fundamentals and potential for growth.
In my opinion, Credit Corp's underperformance is a temporary blip, and the stock is likely to rebound as the market recognizes its true value. Investors who are willing to take a long-term view and embrace the potential for dividend income and capital appreciation may find Credit Corp an attractive addition to their portfolio.
