Craig-Hallum: Time To Buy LendingClub

Craig-Hallum’s Bradley Berning initiated coverage of LendingClub Corp LC with a Buy rating and a price target of $13.

“LendingClub’s brand, underwriting, and structural cost advantage is creating a unique online marketplace lending model that is providing lower cost loans to borrowers and attractive yields to investors,” analyst Bradley Berning said.

Sustainable Model

LendingClub’s model appears to be more sustainable than was perceived by investors and is likely to generate robust revenue growth and operating leverage, Berning mentioned. The reasons are:

1. LendingClub’s underwriting has a strong track record, with investors not losing money on loans made in 2008 or 2009.
2. The company’s underwriting had remained consistent, despite high origination growth, as reflected by an analysis if 7.2 million loans and denied applications.
3. LendingClub has “workable solutions” to regulatory risks.
4. The company has exhibited pricing power to overcome rising loss trends.
5. Regional & Community Banking Channel provides 25 percent of Funding Mix, and this has a strong permanent capital base. “There is a significant opportunity to grow this channel as LendingClub provides a truly competitive model to compete against the big banks that have historically blocked them from the consumer loan market,” the analyst wrote.

The company is likely to be able to use Revolving Master Trust structures to reduce funding risk with dedicated reinvestment from principal payments.

Profitability Projections

Berning projected LendingClub’s revenue to more than double from 2015 to 2017, while expressing confidence in management’s EBITDA margin estimate of 40 percent. This translates to an EPS of $1.06 by 2020.