Encore Capital Group (ECPG) Stock Dropped, So What Is Driving Attention Now?
Encore Capital Group (ECPG) has been in focus after its stock more than doubled, driven by record debt collections and rising charge-offs that coincided with a Q2 earnings beat and higher full-year guidance.
Some heat has come out of the move, with the share price falling 3.9% in the last session and down 8.4% over the past month. Even so, Encore Capital Group still carries a 68.9% year to date share price return and a 118.7% 1 year total shareholder return. This suggests recent profit taking is affecting a stock that has already rerated sharply on changing expectations for its earnings power and risk profile.
Scan for other rerating stories like Encore Capital Group by reviewing the hand picked 30 high quality undervalued stocks, which combine earnings power with balance sheet strength.
Encore Capital Group has already rewarded investors who were in early. The harder call now is whether to add exposure after this surge, or wait for sentiment and price to cool before reassessing valuation.
Most Popular Narrative: 22% Undervalued
Encore Capital Group last closed at $94.47, while the most followed narrative on the stock points to a fair value of $120.38, which frames the recent pullback as a move inside a wider undervaluation debate.
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 22% undervalued.
Result: Fair Value of $120.38 (UNDERVALUED)
Still, the Encore Capital Group story can be knocked off course if management missteps on future write downs or fails to convince investors about its technology and execution.
Find out about the key risks to this Encore Capital Group narrative.
Next Steps
Mixed on Encore Capital Group after this surge, and the pointed risks and rewards investors are weighing. If you want to move fast and make up your own mind, start by reviewing the 4 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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