On Thursday, Wolfe Research raised its rating on shares of Bread Financial Holdings (NYSE:BFH) stock to Outperform from Peerperform, setting a price target of $48.00. The firm indicated a shift in perspective due to signs that credit quality concerns are diminishing and the company's ability to handle potential regulatory changes.
The upgrade reflects a change in the analyst's view after two years of caution about the company's prospects. The concerns were primarily focused on the potential for a recession triggered by monetary policy and the impact of the Consumer Financial Protection Bureau's (CFPB) late fee rule, which posed a significant threat to the company's earnings per share (EPS).
With current developments, however, the analyst sees a positive turn in delinquency (DQ) rate trends and believes Bread Financial can adjust to lower late fees.
The report noted that despite Bread Financial's exposure to consumers on the lower end of the income scale, there are promising signs that delinquency rate formations are declining, and it is expected that the company's net charge-off (NCO) rate formations will follow suit.
Wolfe Research highlighted the company's conservative reserve rate, which is 271 basis points above Day 1 levels, suggesting that Bread Financial is well-prepared to handle potential losses without significant additional reserves.
The analyst's outlook is buoyed by the current state of the labor market and the benign credit environment. Even if labor market conditions were to deteriorate, Wolfe Research believes that any headwinds would be modest and that Bread Financial's established reserves should provide a cushion against slightly higher losses.
In conclusion, Wolfe Research's updated stance on Bread Financial Holdings reflects a more optimistic view of the company's ability to navigate economic challenges and regulatory changes, underpinned by improving credit quality indicators and a strong labor market. The firm's new price target of $48.00 suggests a potential upside for the stock from its current trading levels.
InvestingPro Insights
As Wolfe Research upgrades Bread Financial Holdings (NYSE:BFH) to Outperform with a positive outlook on the company's adaptability and credit quality, InvestingPro data provides a broader financial perspective. Bread Financial is currently trading at a low earnings multiple with a P/E Ratio of just 2.37, reflecting a market sentiment that may not have fully priced in the company's earnings potential. Despite concerns over weak gross profit margins, the company's revenue has grown significantly in the last twelve months as of Q4 2023, with a notable 37.1% increase, suggesting operational growth that could support an optimistic forecast.
Moreover, with a dividend yield of 2.37%, Bread Financial has demonstrated a commitment to shareholder returns, maintaining dividend payments for 9 consecutive years. This consistency indicates a level of financial stability that could be appealing to income-focused investors. However, it's important to note that analysts have revised their earnings downwards for the upcoming period, and net income is expected to drop this year, which might raise caution among potential investors.
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