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Will LendingClub (LC) Pull Off a Surprise in Q1 Earnings?

LendingClub Corporation LC is slated to announce first-quarter 2016 results on May 9, after the market closes.

Last quarter, LendingClub’s adjusted earnings surpassed the Zacks Consensus Estimate. Results benefited from substantial growth in revenues, partly offset by escalating costs.

Also, the company recorded an average positive surprise of 122.2% for the trailing four quarters. Will LendingClub be able to maintain its earnings streak this quarter? Or will mounting expenses hurt its results again?

Let us see what our model indicates:

Our proven model does not conclusively show that LendingClub will beat earnings this time. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at 0.00%.

Zacks Rank: LendingClub’s Zacks Rank #3 increases the predictive power of ESP, but we need to have a positive ESP as well to be sure of an earnings beat.

Factors to Influence Q1 Results

Several companies, dependent on securitization funding, experienced soft markets during the first quarter. However, LendingClub remains well positioned on the back of its diversified funding sources, where loan originations mostly come from retail investors and banks.

Nonetheless, a drop in institutional demand will certainly have an impact on the company’s profitability this quarter.

Also, certain challenges plaguing the online lending industry, such as venture capital funding, interest rate risk, the economic cycle and the regulatory landscape will likely weigh on LendingClub’s profitability as well.

However, LendingClub’s primary source of revenues is transaction fees on loans that it helps to issue, and subsequently lists online for investors to fund. Therefore, as we expect loan originations to grow in the quarter, the company’s transaction fees should rise as well.

Additionally, the company’s investments in channel diversification and ability to offer affordable credit to a wide spectrum of borrowers will continue to support overall revenue growth.

Notably, management projects operating revenues in a range of $147–$149 million for the upcoming release. Also, adjusted EBITDA is anticipated within $25–$27 million.

LendingClub seeks to maximize the use of technology to make borrowing cheaper and easier. However, at the same time, the company needs to constantly maintain and upgrade its online platform, thus increasing technology-related expenses.

Despite minimal overhead costs involved with brick-and-mortar branches, LendingClub incurs significant expenditure for selling and marketing its products. Further, origination and servicing expenses should increase in the quarter, triggered by a rise in loan originations. Hence, overall expenses should trend higher in the quarter, thereby hurting the company’s bottom line.

Notably, LendingClub’s quarterly activities were inadequate to impress analysts. Hence, over the last 7 days, the Zacks Consensus Estimate for the quarter did not change from 1 cent per share.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Garrison Capital Inc. GARS has an Earnings ESP of +6.25% and a Zacks Rank #3. It is scheduled to report on May 9.

The Earnings ESP for Financial Engines, Inc. FNGN is +6.67% and it has a Zacks Rank #2. The company is expected to report on May 10.

The Toronto-Dominion Bank TD has an Earnings ESP of +6.90% and a Zacks Rank #2. It is expected to release results on May 26.

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LENDINGCLUB CP (LC): Free Stock Analysis Report
TORONTO DOM BNK (TD): Free Stock Analysis Report
GARRISON CAPITL (GARS): Free Stock Analysis Report
FINANCIAL ENGIN (FNGN): Free Stock Analysis Report
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