Even before the pandemic, U.S. household debt was a significant problem. Now that we’re in a recession, debt has become a crisis, with many people out of work. Not only are people having a hard time paying off their current debt, but many are also taking on more debt to pay for groceries and rent.
This presents an opportunity for a company such as Encore Capital Group (ECPG), the largest publicly traded debt buyer in the U.S. It provides debt recovery solutions for consumers and property owners across a broad range of financial assets.
ECPG purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals to repay their obligations and work towards financial recovery.
While the company has operations in 15 countries, much of its revenue is generated in the U.S. and U.K. The company’s primary subsidiary, Midland Credit Management, has worked with over 7 million people in the U.S. to repay their debts. Midland Credit Management was founded in 1953 and bought by an investor group led by Nelson Peltz of Triarc Companies in 1998. It went public the following year.
The company grew through acquisitions over the past ten years. In June of 2013, ECPG acquired Asset Acceptance Corporation, a publicly held debt buyer based in Warren, Michigan, and in the following year, acquired Virginia-based Atlantic Credit & Finance. In 2018, the company entered the European market with the acquisition of UK-based Cabot Financial.
ECPG reported its latest financial results earlier this month and outperformed the consensus analyst estimates in earnings and revenue. EPS was up 40.9% year over year, while revenue increased 13.4%. This was driven by strong collections, as the company’s overall collections were up 8% year over to $540 million.
The company’s return on equity also reached 21.3%, on a trailing 12 months basis in the quarter, as it was able to deploy capital at solid returns.
Midland Credit Management saw record collections of $391 Million in the quarter, driven by strong growth in call centers & the digital collections channel. Call Center & Digital Collections were up 32%. Cabot’s cost management enabled strong profitability for ECPG, despite the pandemic, although the company saw a better supply for debt to purchase in the U.S. than in Europe.
Management has been focused on three strategic priorities to position the company well for the future. The first is to focus on the U.S. and U.K markets, as they’re the most valuable. The second priority is to maintain a competitive advantage by enhancing its advantages in its core markets, and third, strengthening its balance sheet.
To streamline its balance sheet, ECPH had a goal of combining the strength of its U.S. and European balance sheets into one unified global funding structure. The company accomplished this in September and now has enhanced access to capital markets, an improved ability to deploy capital in the market, and a line of sight to reduce its funding costs.
Most analysts rate the stock a “Buy” with an average price target of $54.50, representing over 60% upside. The stock currently has a 4.9 P/E and a 0.7 Price to Sales ratio, indicating it is very undervalued. There is a ton of bad debt out there for ECPG to pick up, and with a growth forecast of 24% over the next five years, this is a small company with enormous upside potential.
ECPG shares fell $0.27 (-0.80%) in after-hours trading Wednesday. Year-to-date, ECPG has declined -4.50%, versus a 12.28% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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