In a market at historical highs, it is getting increasingly difficult to find high-quality undervalued stocks. However, Encore Capital Group, Inc. (NASDAQ:ECPG) might be just what value investors are looking for. The company is engaged in consumer debt buying and recovery. It purchases portfolios of defaulted consumer receivables at deep discounts to face value and uses a variety of operational channels to maximize its collections from these portfolios. So, should investors buy shares of the company?
Valuation
The stock trades at below-average valuation with regards to its group, its competitors, and the general market. It currently has a price-to-earnings ratio of just 9.2, slightly better than its also-attractive competitor Discover Financial Services (NYSE:DFS), or than that of Asset Acceptance Capital Corp. (NASDAQ:AACC).
When taking future earnings estimates into account, Encore Capital Group, Inc. (NASDAQ:ECPG) again emerges as a leader: With a forward P/E ratio of only 6.8, the stock has an edge over its competitors (Discover Financial Services (NYSE:DFS)’s is 9.4 and Asset Acceptance Capital Corp. (NASDAQ:AACC)’s is 11.2). The same holds true when taking growth into the equation: Encore Capital Group, Inc. (NASDAQ:ECPG)’s very attractive PEG of 0.6 is better than that of its competitors.
However, while the stock has a good P/B ratio (1.6), Asset Acceptance Capital Corp. (NASDAQ:AACC) does have a slightly better figure (1.3). At any rate, it is clear that the stock is trading at very attractive valuations, and that it’s one of the cheapest stocks in its group.
Analysts
Analysts are mostly bullish on Encore Capital Group, Inc. (NASDAQ:ECPG). The stock currently has an average recommendation of 1.7 (buy-overweight), and an average price target of $38.83, which implies that the stock has an upside potential of almost 40%. Neither Asset Acceptance Capital Corp. (NASDAQ:AACC) or Discover Financial Services (NYSE:DFS) have price targets or analyst recommendations that are as high.
| P/E | Fw P/E | P/B | PEG | Avg Rec | Avg PT (%implied upside) | |
| ECPG | 9.2 | 6.8 | 1.6 | 0.6 | 1.7 | $38.83 (+39%) |
| AACC | 18.5 | 11.2 | 1.3 | 1.2 | 3.0 | $7.25 (+11.7%) |
| DFS | 9.9 | 9.4 | 2.3 | 0.9 | 1.8 | $48.12 (+9%) |
| Edge | ECPG | ECPG | AACC | ECPG | ECPG | ECPG |
Competitors
Encore Capital Group, Inc. (NASDAQ:ECPG)’s lead is clear in valuation ratios and analyst ratings, but it is also worth noting that some of its competitors are hardly stocks from which to stay away. With regards to Discover Financial Services (NYSE:DFS), for example, the company has had significant revenue growth, solid stock-price performance, growth in earnings per share, increase in net income and expanding profit margins. As a big player in the financial-services industry, it should benefit from the upbeat environment and the low interest rates, and is likely to do well this year.
Asset Acceptance Capital Corp. (NASDAQ:AACC) is, on paper, slightly more troubled, but will benefit from being bought by Encore Capital Group, Inc. (NASDAQ:ECPG). Combining Asset Acceptance’s investments with Encore Capital’s solid operating and cost advantages should increase profitability for both companies. Encore Capital will acquire Asset Acceptance Capital Corp. (NASDAQ:AACC) for $6.50/share (slightly below the stock’s current price), an equity value of about $200 million.
Price movements
Despite the attractive valuation ratios and the bullish analysts, Encore Capital has not had a good run this year. While as a whole the market is up significantly year-to-date, Encore Capital has lost almost 8% of its value; especially since mid-February. It is now 14.7% off its 52-week high of $33.07, and 29.7% above its 52-week low of $21.74. Historically, however, the stock is trading near its all-time highs, and comfortably above its financial-crisis lows of 2009 (it was as low as $3.10 in March 2009).
Insider buying
On April 22, Encore Capital’s director Willem Mesdag bought 350,000 shares of the company in the open market at an average price of $28 per share. That is a total purchase price of $9.8 million: Mr. Mesdag has spent almost $10 million of his own money to buy shares.
However, this operation is not an isolated event: On the same day, Mr. George Lund, the company’s executive chairman, actually sold exactly 350,000 shares, also at an average price of $28. So, rather than a very significant insider-buying event, this seems more like a hand-changing operation between two company insiders. The percentage of shares insiders own has therefore not changed.
Looking ahead
On May 9, the company reported EPS $0.86, beating the consensus estimate of $0.80 and representing a 23% increase with regards to the same quarter last year. Revenue was $144.3 million, slightly below analysts expectations of $150 million. The company’s revenue is up 14.1% compared to the same quarter last year. With regards to earnings, this report solidifies Encore Capital’s record of delivering better-than-expected earnings.
Encore’s capital strengths lie in its India-based low-cost collection platform, which has a sophisticated computer algorithm that determines which channel to send paper to. This collection platform does not only work for loans, and could be adapted to make it extensible to other places and asset classes. This would allow Encore capital to expand its collecting operations into tax liens or bankruptcy paper. The economic recovery is also good news for Encore: More people should be able to pay back their loans, therefore increasing the company’s revenue.
The stock has been dragged down by fears arising from the increased regulation by the Consumer Financial Protection Bureau (CFBP). The agency, founded as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, started operations in July 2011.
Since then, Encore Capital’s stock has lost about 3% in value, while the Dow Jones Industrial Average (INDEXDJX:.DJI) is up almost 25%. While it is true that increased regulations from the CFBP could make Encore Capital’s collecting strategies subject to more scrutiny, the company’s strengths do not lie in the engagement of unethical debt-collecting procedures, so the company should not suffer excessively from the existence of the bureau.
The stock price, however, has indeed been held back because of CFBP fears, which is why it is trading at such attractive valuations. If anything, these prices might be a good entry point to buy some of Encore Capital shares.
Bottom line
A solid business with potential growth opportunities, a stock price that has been excessively dragged down by fear, a history of positive earnings surprises, and very attractive valuation ratios should make value investors seriously consider adding Encore Capital shares to their portfolios.
The article An Undervalued Stock in the Credit-Services Industry originally appeared on Fool.com is written by Alex Bastardas.
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