3 Reasons OMF is Risky and 1 Stock to Buy Instead

OneMain has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 15.5% to $59.85 per share while the index has gained 17.2%.

Is there a buying opportunity in OneMain, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Is OneMain Not Exciting?

We're swiping left on OneMain for now. Here are three reasons why OMF doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

Regrettably, OneMain’s revenue grew at a sluggish 4.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the financials sector.

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

OneMain’s weak 3.4% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

OneMain currently has $22.34 billion of debt and $3.38 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 6.6×. We think this is dangerous - for a financials business, anything above 3.5× raises red flags.

Final Judgment

OneMain isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 7.8× forward P/E (or $59.85 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.

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