Citi downgrades Rocket Companies and upgrades Sallie Mae in consumer finance sector
In a note released on Tuesday, Citi analysts announced their decision to downgrade Rocket Companies (RKT) to Sell from Neutral, while simultaneously upgrading Sallie Mae (SLM) to Buy from Neutral. The move comes as part of their coverage of the US consumer finance sector.
Consumer finance outlook for 2024 in line with or better than expectations, says Citi analysts
Citi analysts expressed optimism regarding the outlook for consumer finance companies in 2024. They believe that these companies are poised to meet or even exceed consensus expectations in the coming years. The focus for investors, according to Citi, will mainly be on credit quality, as non-collectable loans (NCOs) are expected to peak in the first half of the year.
Sallie Mae upgraded on higher expected balance sheet growth and competitor exit
Sallie Mae received an upgrade from Citi analysts, who also raised the target price from $14 to $23. This upgrade was driven by the anticipation of higher balance sheet growth, the potential to gain market share from a competitor exit, and the expectation of higher gain on sale margins as interest rates decline from their currently elevated levels. Citi stated that the target price increase was justified by higher earnings per share, extending the outlook to 2025, and a revised multiple of 7.1x, up from the previous 5.2x. Citi believes that this multiple accurately reflects Sallie Mae’s growth opportunities as the company shifts away from selling the majority of its loan production in the coming years.
Citi raises price target for RKT but believes valuation is too stretched
While Citi analysts did raise the price target for Rocket Companies to $10 from $9, they expressed concerns about the company’s valuation. The analysts noted that RKT shares have surged by 52% over the past three months, which they believe has led to an overvaluation. Despite acknowledging the company’s strong brand and technology-forward approach to the mortgage market, Citi stated that the current valuation is stretched and does not align with the company’s fundamentals.
Citi highlights credit quality as key focus for investors in consumer finance sector
Citi analysts emphasized that credit quality will be a vital focus for investors in the consumer finance sector. They anticipate that non-collectable loans will reach their highest levels in the first half of the year. As a result, investors will closely monitor credit quality metrics when evaluating opportunities in the sector. Citi’s downgrade of Rocket Companies and upgrade of Sallie Mae reflect their assessment of the respective companies’ credit quality and growth prospects, aligning with their prediction that it will be a significant consideration for investors moving forward.
Analyst comment
Positive news:
– Consumer finance outlook for 2024 in line with or better than expectations
– Sallie Mae upgraded on higher expected balance sheet growth and competitor exit
– Citi raises price target for RKT
Negative news:
– Citi downgrades Rocket Companies
– Citi believes Rocket Companies’ valuation is too stretched
Neutral news:
– Citi analysts highlight credit quality as key focus for investors in consumer finance sector
– Citi’s downgrade of Rocket Companies and upgrade of Sallie Mae reflect their assessment of credit quality and growth prospects
As an analyst, I predict that the market will evaluate consumer finance companies based on their credit quality and growth prospects. Sallie Mae is expected to benefit from higher balance sheet growth and potential market share gains, while Rocket Companies’ valuation may face challenges despite a raised price target. The market outlook for consumer finance sector in 2024 appears positive, with expectations of meeting or exceeding consensus.
