Solid quarterly results spark fresh interest
Encore Capital Group (ECPG) is back in focus after solid quarterly financial results that helped push the stock higher. Investors are weighing this short term strength against slower historical revenue growth and higher leverage.
Recent trading has reflected that tension. Encore Capital Group’s share price has delivered an 8.6% 90 day share price return and a 75.1% year to date share price return, while the 1 year total shareholder return of 141.0% points to strong momentum already priced in by investors.
Compare Encore Capital Group’s surge with other financially driven rebound stories by scanning our hand picked list of 27 high quality undervalued stocks that already show strong balance sheets and cash generation.
Encore Capital Group now trades about 18% below average analyst price targets after a sharp rerating this year. Is that a genuine margin of safety, or is it the market’s way of pricing slow growth and higher leverage?
Most Popular Narrative: 19% Undervalued
Encore Capital Group last closed at $97.92, while the most followed valuation narrative anchors on a fair value of $120.38, implying a sizeable gap that some investors see as a margin of safety rather than a mirage.
As I have previously written, ECPG is solid and undervalued. Despite recent analyst attention and a meaningful increase in its share price, I believe it remains undervalued. My valuation starts with its ERC, or Estimated Remaining Collections, which, based on the company’s latest filings, is approximately $10 billion. On that basis alone, the runoff or liquidation value of the company appears to far exceed its current market cap of less than $2 billion. Analysts are currently providing valuation ranges of roughly $80 to $110 per share, largely based on performance and earnings outlook. In my view, that range still misses five important short and long term considerations. First, ECPG has established itself as the dominant player in its industry. Dominant players often benefit from a flywheel effect, where small advantages compound into durable momentum. They can also command a premium because their purchasing costs and financing costs are often lower than those of competitors, given their scale, reputation, and access to capital. Second, tax refunds should support stronger collections in the near term quarters. Third, over the long term, technology is now being adopted with an urgency that was absent in the past. That said, technology adoption must be calculated. ECPG has previously been entangled in regulatory issues, but, ironically, that history may now serve as an advantage: the company’s sensitivity to regulatory risk should force it to adopt technology carefully and responsibly. That calculated approach should serve it well. Fourth, one of the strengths of ECPG’s business is the transparency of its cash generation. Earnings that are closely tied to cash collections are harder to manipulate, which should give investors greater confidence, even if the industry itself is not particularly exciting. Finally, I expect ECPG to exceed a $2 billion market cap. Once it does, it will no longer be viewed as a small cap company and should come onto the radar of a broader group of institutional investors. That re rating potential is another reason I remain bullish.
See why 9 investors see Encore Capital Group as 19% undervalued.
Result: Fair Value of $120.38 (UNDERVALUED)
Still, the Encore Capital Group story can break if management misfires again on acquisitions or goodwill, or if regulators tighten rules on collection practices.
Find out about the key risks to this Encore Capital Group narrative.
Next Steps
If this mix of strong recent returns and flagged issues around Encore Capital Group feels unclear, do not wait to form an informed opinion. Review the full picture of potential upsides and watchpoints in the 3 key rewards and 1 important warning sign.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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