By Michael Kim
READ THE FULL CPSS RESEARCH REPORT
After the market closed on 8/11/25, Consumer Portfolio Services (NASDAQ:CPSS) reported 2Q25 earnings results. For the quarter, CPSS reported net income of $4.8 million, or $0.20 per share versus our $0.26 EPS estimate. Relative to our model, the EPS miss entirely reflected higher-than-anticipated interest expense (largely a function of the prevailing rate backdrop), as revenue matched our forecast and non-interest expenses came in meaningfully below our estimates.
Focusing on the top line, total revenues grew 14.5% year-over-year from $95.9 million in 2Q24 to $109.8 million in 2Q25 – essentially in line with our $109.6 million estimate. A step up in interest income reflecting a higher average outstanding balance of finance receivables and enhanced yields, partially offset by less favorable mark to finance receivables measured at fair value and lower other income, drove the year-over-year growth.
Total expenses of $102.8 million in 2Q25 were up 15.2% from the year-ago period, and came in 2.6% ahead of our $100.2 million forecast. Despite lower compensation, G&A, and other costs, the unfavorable variance was entirely driven by higher-than-expected interest expense reflecting ongoing growth in securitization trust debt and higher rates. That said, we note operating expenses (on an annualized basis) as a percentage of the company’s average portfolio balance came in at 4.9% for 2Q25, down from 5.7% in the prior-year quarter, and the lowest level looking back over the last 10+ years, as management remains focused on maximizing efficiencies.
After updating our model for 2Q25 actuals, we are lowering our 2025 and 2026 EPS estimates from $1.17/$2.45 to $0.94/$1.85. Our revisions primarily reflect: 1) a slightly flatter step up in revenues given more measured growth in loan originations; and 2) stubbornly high interest expense in light of ongoing growth in securitization debt combined with a stable (near-term) interest rate backdrop. That said, we note our 2026 EPS estimate represents 98% year-over-year growth, as revenue growth accelerates and operating leverage builds. Stepping back, we forecast rising risk-adjusted Net Interest Margins next year, even as the NIM ticked down by 30 bps quarter-over-quarter in 2Q25, based on lower cost of funds (eventually), with our estimates assuming interest expense as a percentage of average portfolio balances (6.4% in 2Q25) tightens by ~30 basis points in 2H25 followed by a further ~50 basis points looking out to 2026. To be conservative, our model incorporates a cost of funds of 5.6% for next year, still above the company’s historical average of around 4.5%. Finally, we still see meaningful operating leverage driving outsized margin expansion reflecting existing infrastructure and management’s ongoing focus on extracting further efficiencies. Indeed, our model assumes operating margins (6.3% in 2Q25) rebuild to around 13% in 2026, while ROAs trend from 0.8% for the most recent quarter to 1.5% in 2026 (still below CPSS’s return on assets in 2022 and 2023).
Turning to valuation, despite our lower earnings outlook, we are maintaining our price target at $15, or well above the stock’s current level. Our model forecasts CPSS’s book value per diluted share to reach $13.19 by the end of 2025, with ROEs rising to 13% looking out to 2026 largely reflecting reaccelerating growth in loan originations and related finance receivables, as well as lower cost of funds. As the “Street” increasingly recognizes the company’s growth trajectory and underlying earnings power, we look for a meaningful upward revaluation for the stock, particularly given relative multiples.
To be sure, Price-to-Tangible Book Value and Price-to-Earnings multiples remain meaningfully higher across a subset of public companies with sizeable auto finance businesses. While we recognize most peer companies are significantly larger and more diversified, with considerable infrastructure, resource, and financial advantages, CPSS maintains a sizeable lead in terms of projected growth, thereby justifying comparable multiples, in our minds. Our $15 price target assumes the stock trades at ~1.2x current book value of $12.54.
We highlight the following key takeaways from 2Q25 results:
1. Healthy origination volumes continue to drive strong portfolio growth: The company’s total portfolio balance of $3.7 billion as of the end of 2Q25 increased by 2.6% compared to $3.6 billion as of the end of 1Q25 and 16.9% year-over-year. Loan origination volumes remain strong, with CPSS purchasing $433 million of new auto installment sales contracts in 2Q25 – generally consistent with 1Q25 and prior-year quarter run-rates, and the second-highest second-quarter level in the company’s 34-year history. Looking ahead, our model calls for $1.8 billion of loan originations in 2025, followed by $2.1 billion next year, representing 9% and 12% growth rates, respectively. Our assumptions reflect steady demand trends, increasing throughput from the company’s pass-through partnership with Ally Financial, improving funding rates, and as newer salespeople continue to season.
2. Ongoing securitizations + lower cost of funds: On the funding side, CPSS recently completed the company’s 56th securitization by selling $418 million of asset-backed notes following the $420 million offering in May. Importantly, demand for CPSS paper remains high, with $902 million of contracts securitized thus far in 2025. Our model assumes an additional $830+ million of securitizations in the back half of this year, with our full-year forecast of $1.74 billion representing 10% growth compared to $1.26 billion in 2024. Furthermore, coupons continue to trend lower. Indeed, the weighted average coupon for the most recent securitization was 5.43%, down from 5.96% for the prior transaction in May, and the lowest rate since April 2022. CPSS’s ABS volumes have remained consistently strong ($400+ million for each of the last five securitizations), while related cost of funds have continued to trend lower – a powerful combination from an earnings power perspective. Looking ahead, the Fed seemingly remains wary of elevated inflation and slowing economic growth. As such, consensus thinking still expects two rate cuts this year, followed by further reductions in 2026 and 2027, with four reductions adding up to 100 bps – boding well for CPSS’s interest expense/NIM.
3. NCOs continue to trend lower: Turning to credit performance, annualized net charge-offs represented 7.45% of CPSS’s average portfolio balance in 2Q25, down from 7.54% in 1Q25, and representing the second consecutive quarter of lower NCOs. Looking ahead, we forecast credit trends to continue to improve reflecting: a) unemployment rates (a key lead indicator for defaults) remain below historical averages; b) management remains conservative as it relates to underwriting standards; c) problematic 2H22/1H23 loans continue to season (down to <35% of the total portfolio), with most of the related paper rolling off by the end of 2025; d) newer/higher-quality loans are increasingly accounting for a greater percentage of the mix; and e) improving recovery rates.
4. Interest rate sensitivity: As mentioned earlier, the 2Q25 EPS miss was entirely a function of higher-than-forecast interest expense. To be sure, interest expense as a percentage of the company’s average portfolio balance came in at 6.4% (on an annualized basis) for the quarter, up from 6.1% in 1Q25, and ~200 bps above CPSS’s 4.5% long-term average. While we prefer to err on the side of caution (our model assumes <100 bps of interest expense relief over the next 18 months), we note our 2026 EPS forecast jumps from $1.85 to $3.17 (70%+ accretion) if we layer in a 4.5% cost of funds for next year (while holding all other assumptions constant). Granted, lower interest expenses will take time to flow through the P&L, as the interest-bearing liability mix increasingly skews in favor of newer/lower-cost securitization trust debt and older/higher-rate vintages roll off. That said, we think our back-of-the-envelope math reinforces the considerable leverage in the model, as interest expense normalizes.
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