Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Undervalued Stocks for the Enterprising Investor – August 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Encore Capital Group Inc (ECPG) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Encore Capital Group, Inc., through its subsidiaries, is a specialty finance company providing debt recovery solutions for consumers and property owners across a range of financial assets. The Company operates through Portfolio Purchasing and Recovery segment. The Company’s geographical segments include the United States, Europe and other. The Company’s portfolios of defaulted consumer receivables at discounts and manages them by partnering with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables also include receivables subject to bankruptcy proceedings. The Company through certain subsidiaries, is engaged in portfolio purchasing and recovery in the United States, including Puerto Rico.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$1,003,897,128||Fail|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.57||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||108.70%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||13.04||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.86||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.57||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-26.83||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Fail|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||2.95%|
|MG Value based on 3% Growth||$43.37|
|MG Value based on 0% Growth||$25.43|
|Market Implied Growth Rate||2.27%|
|% of Intrinsic Value||90.50%|
Encore Capital Group, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $2.5 in 2013 to an estimated $2.99 for 2017. This level of demonstrated earnings growth supports the market’s implied estimate of 2.27% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Encore Capital Group, Inc. revealed the company was trading below its Graham Number of $41.55. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 13.04, which was below the industry average of 21.55, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-121.96.
Encore Capital Group, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$121.96|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2017|
|Total Current Assets||$146,647,000|
|Total Current Liabilities||$256,982,000|
|Shares Outstanding (Diluted Average)||26,391,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.51|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.99|
Other ModernGraham posts about the company
None. This is the first time ModernGraham has covered the company.
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.