4 Potential Catalysts For Santander Consumer Drive Analyst Upgrade

Piper Jaffray upgraded shares of Santander Consumer USA Holdings Inc SC from Neutral to Overweight and increased its price target from $14 to $17. The firm thinks the stock represents a very compelling risk-reward, as it trades at a discount to the tangible book value.

Analyst Kevin Barker sees four important catalysts for the company's stock over the next year.

Takeout Looking More of A Reality

Baker believes Santander Consumer's parent Santander Holdings USA will get approval to buyout former CEO's stake, which the analyst believes could happen anytime soon. The analyst believes a potential buyout is compelling and should put a floor on the stock, as Santander Consumer is the best performing entity within the Santander Holdings USA umbrella of companies.

Additionally, the analyst noted that the parent CEO is now running Santander Consumer and that the latter could dividend excess capital to the parent.

The analyst also sees the possibility of the parent company buying out shareholders once the former CEO's stake is bought.

Improving Credit Story

Piper Jaffray sees an improvement in credit conditions, with net charge offs, or NCO, growth slowing. The firm sees first indications of this occurring in late 2017 or early 2018, given that Santander Consumer tightened underwriting in 2015 and consequently, the portfolio becoming less of a headwind.

"If used vehicle pricing does not fall off a cliff, we should see NCO growth rates slow in the next couple of quarters and NCOs stabilize in 2018," the firm said.

Additionally, Piper Jaffray noted that non-prime auto lending has declined as a percentage of overall lending in the last few quarters. The firm feels the market will give Santander Consumer a better P/E multiple on the stock if visibility into the slowdown in the NCO growth rate improves.

ROE Improvement

The firm believes the company's sale of Bluestem will serve to remove a drag on ROE, or Return on Equity, in the next two to four quarters.

Stock Buyback

Piper Jaffray also noted that Santander Consumer has got approval to buy back stock in June 2018 during the next Fed's Bank stress test.

Concluding, the firm said the stock could trade to $20+ levels if credit trends revert to 2016 levels.