Encore Capital Group Inc Valuation – Initial Coverage $ECPG

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.

ECPG Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ECPG – August 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

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

EPSmg $2.99
MG Growth Estimate 2.95%
MG Value $43.09
Opinion Fairly Valued
MG Grade C
MG Value based on 3% Growth $43.37
MG Value based on 0% Growth $25.43
Market Implied Growth Rate 2.27%
Current Price $39.00
% 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
Graham Number $41.55
PEmg 13.04
Current Ratio 0.57
PB Ratio 1.86
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0


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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2017
Total Current Assets $146,647,000
Total Current Liabilities $256,982,000
Long-Term Debt $2,959,820,000
Total Assets $3,918,797,000
Intangible Assets $861,258,000
Total Liabilities $3,365,284,000
Shares Outstanding (Diluted Average) 26,391,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.51
Dec2016 $2.96
Dec2015 $1.69
Dec2014 $3.77
Dec2013 $2.87
Dec2012 $2.69
Dec2011 $2.37
Dec2010 $1.95
Dec2009 $1.37
Dec2008 $0.59
Dec2007 $0.64
Dec2006 $1.03
Dec2005 $1.30
Dec2004 $0.99
Dec2003 $0.88
Dec2002 $0.84
Dec2001 -$1.52
Dec2000 -$3.20
Dec1999 -$0.01
Dec1998 $1.49

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.99
Dec2016 $2.75
Dec2015 $2.66
Dec2014 $3.01
Dec2013 $2.50
Dec2012 $2.14
Dec2011 $1.71
Dec2010 $1.29
Dec2009 $0.97
Dec2008 $0.81
Dec2007 $0.94
Dec2006 $1.06
Dec2005 $0.88
Dec2004 $0.32
Dec2003 -$0.21
Dec2002 -$0.67
Dec2001 -$1.16

Recommended Reading:

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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.

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