Intrinsic value of Encore Capital Group - ECPG

Previous Close

$40.00

  Intrinsic Value

$58.72

stock screener

  Rating & Target

buy

+47%

  Value-price divergence*

-114%

Previous close

$40.00

 
Intrinsic value

$58.72

 
Up/down potential

+47%

 
Rating

buy

 
Value-price divergence*

-114%

Our model is not good at valuating stocks of financial companies, such as ECPG.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ECPG stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -8.94
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  1,029
  1,050
  1,074
  1,101
  1,132
  1,167
  1,204
  1,245
  1,290
  1,338
  1,389
  1,444
  1,502
  1,565
  1,631
  1,701
  1,776
  1,855
  1,938
  2,027
  2,120
  2,218
  2,322
  2,431
  2,546
  2,667
  2,795
  2,929
  3,070
  3,219
  3,375
Variable operating expenses, $m
 
  622
  634
  649
  665
  682
  702
  723
  746
  771
  798
  747
  778
  810
  844
  881
  919
  960
  1,004
  1,049
  1,097
  1,148
  1,202
  1,258
  1,318
  1,381
  1,447
  1,516
  1,590
  1,667
  1,747
Fixed operating expenses, $m
 
  186
  190
  195
  200
  205
  210
  215
  221
  226
  232
  237
  243
  250
  256
  262
  269
  275
  282
  289
  297
  304
  312
  319
  327
  336
  344
  353
  361
  370
  380
Total operating expenses, $m
  788
  808
  824
  844
  865
  887
  912
  938
  967
  997
  1,030
  984
  1,021
  1,060
  1,100
  1,143
  1,188
  1,235
  1,286
  1,338
  1,394
  1,452
  1,514
  1,577
  1,645
  1,717
  1,791
  1,869
  1,951
  2,037
  2,127
Operating income, $m
  242
  242
  249
  258
  268
  279
  292
  307
  323
  341
  360
  459
  481
  505
  531
  558
  588
  619
  653
  688
  726
  766
  808
  853
  900
  951
  1,004
  1,060
  1,119
  1,182
  1,248
EBITDA, $m
  277
  324
  331
  340
  350
  362
  375
  390
  406
  424
  443
  464
  486
  510
  536
  564
  594
  625
  659
  695
  733
  773
  816
  861
  909
  960
  1,013
  1,070
  1,130
  1,193
  1,260
Interest expense (income), $m
  148
  143
  147
  150
  155
  159
  165
  170
  177
  184
  191
  199
  207
  217
  226
  236
  247
  259
  271
  284
  297
  312
  327
  343
  360
  378
  396
  416
  437
  459
  482
Earnings before tax, $m
  57
  99
  103
  107
  113
  120
  128
  136
  146
  157
  169
  260
  274
  289
  305
  322
  341
  360
  382
  404
  428
  454
  481
  510
  541
  573
  608
  644
  683
  723
  767
Tax expense, $m
  38
  27
  28
  29
  31
  32
  34
  37
  39
  42
  46
  70
  74
  78
  82
  87
  92
  97
  103
  109
  116
  123
  130
  138
  146
  155
  164
  174
  184
  195
  207
Net income, $m
  77
  72
  75
  78
  83
  88
  93
  100
  107
  115
  123
  190
  200
  211
  222
  235
  249
  263
  279
  295
  313
  331
  351
  372
  395
  418
  444
  470
  498
  528
  560

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  150
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  3,671
  3,594
  3,677
  3,772
  3,878
  3,995
  4,124
  4,265
  4,417
  4,581
  4,756
  4,944
  5,145
  5,359
  5,586
  5,827
  6,082
  6,352
  6,638
  6,940
  7,259
  7,596
  7,951
  8,325
  8,719
  9,134
  9,571
  10,031
  10,515
  11,024
  11,560
Adjusted assets (=assets-cash), $m
  3,521
  3,594
  3,677
  3,772
  3,878
  3,995
  4,124
  4,265
  4,417
  4,581
  4,756
  4,944
  5,145
  5,359
  5,586
  5,827
  6,082
  6,352
  6,638
  6,940
  7,259
  7,596
  7,951
  8,325
  8,719
  9,134
  9,571
  10,031
  10,515
  11,024
  11,560
Revenue / Adjusted assets
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
  0.292
Average production assets, $m
  95
  97
  99
  101
  104
  107
  111
  115
  119
  123
  128
  133
  138
  144
  150
  157
  163
  171
  178
  186
  195
  204
  214
  224
  234
  245
  257
  269
  282
  296
  311
Working capital, $m
  0
  -153
  -157
  -161
  -165
  -170
  -176
  -182
  -188
  -195
  -203
  -211
  -219
  -228
  -238
  -248
  -259
  -271
  -283
  -296
  -309
  -324
  -339
  -355
  -372
  -389
  -408
  -428
  -448
  -470
  -493
Total debt, $m
  2,809
  2,874
  2,948
  3,031
  3,125
  3,229
  3,343
  3,467
  3,601
  3,746
  3,902
  4,068
  4,245
  4,434
  4,635
  4,848
  5,074
  5,313
  5,565
  5,832
  6,114
  6,412
  6,725
  7,056
  7,404
  7,771
  8,158
  8,564
  8,992
  9,442
  9,916
Total liabilities, $m
  3,111
  3,177
  3,251
  3,334
  3,428
  3,532
  3,646
  3,770
  3,904
  4,049
  4,205
  4,371
  4,548
  4,737
  4,938
  5,151
  5,377
  5,616
  5,868
  6,135
  6,417
  6,715
  7,028
  7,359
  7,707
  8,074
  8,461
  8,867
  9,295
  9,745
  10,219
Total equity, $m
  559
  417
  427
  438
  450
  463
  478
  495
  512
  531
  552
  574
  597
  622
  648
  676
  706
  737
  770
  805
  842
  881
  922
  966
  1,011
  1,060
  1,110
  1,164
  1,220
  1,279
  1,341
Total liabilities and equity, $m
  3,670
  3,594
  3,678
  3,772
  3,878
  3,995
  4,124
  4,265
  4,416
  4,580
  4,757
  4,945
  5,145
  5,359
  5,586
  5,827
  6,083
  6,353
  6,638
  6,940
  7,259
  7,596
  7,950
  8,325
  8,718
  9,134
  9,571
  10,031
  10,515
  11,024
  11,560
Debt-to-equity ratio
  5.025
  6.890
  6.910
  6.930
  6.950
  6.970
  6.990
  7.010
  7.030
  7.050
  7.070
  7.090
  7.110
  7.130
  7.150
  7.170
  7.190
  7.210
  7.230
  7.240
  7.260
  7.280
  7.290
  7.310
  7.320
  7.330
  7.350
  7.360
  7.370
  7.380
  7.390
Adjusted equity ratio
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116
  0.116

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  77
  72
  75
  78
  83
  88
  93
  100
  107
  115
  123
  190
  200
  211
  222
  235
  249
  263
  279
  295
  313
  331
  351
  372
  395
  418
  444
  470
  498
  528
  560
Depreciation, amort., depletion, $m
  35
  82
  82
  82
  82
  82
  83
  83
  83
  83
  83
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
Funds from operations, $m
  137
  154
  157
  161
  165
  170
  176
  182
  190
  198
  206
  195
  205
  216
  228
  241
  255
  269
  285
  302
  320
  339
  359
  381
  403
  427
  453
  480
  509
  539
  571
Change in working capital, $m
  7
  -3
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
Cash from operations, $m
  130
  157
  161
  165
  170
  175
  181
  188
  196
  205
  214
  203
  213
  225
  238
  251
  266
  281
  297
  315
  333
  353
  374
  396
  420
  445
  472
  500
  529
  561
  594
Maintenance CAPEX, $m
  0
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
New CAPEX, $m
  -32
  -2
  -2
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
Cash from investing activities, $m
  -169
  -5
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -10
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -16
  -18
  -18
  -19
  -20
  -21
  -21
  -23
  -24
  -25
Free cash flow, $m
  -39
  152
  155
  158
  163
  168
  174
  180
  188
  196
  205
  193
  203
  214
  226
  239
  253
  268
  283
  300
  318
  337
  357
  379
  401
  425
  451
  478
  506
  537
  569
Issuance/(repayment) of debt, $m
  95
  65
  73
  84
  94
  104
  114
  124
  134
  145
  155
  166
  177
  189
  201
  213
  226
  239
  253
  267
  282
  297
  314
  331
  348
  367
  386
  407
  428
  450
  473
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  43
  65
  73
  84
  94
  104
  114
  124
  134
  145
  155
  166
  177
  189
  201
  213
  226
  239
  253
  267
  282
  297
  314
  331
  348
  367
  386
  407
  428
  450
  473
Total cash flow (excl. dividends), $m
  -4
  217
  228
  242
  257
  272
  288
  305
  322
  341
  360
  359
  381
  403
  427
  452
  479
  507
  536
  567
  600
  634
  671
  709
  750
  792
  837
  884
  934
  987
  1,042
Retained Cash Flow (-), $m
  37
  -8
  -10
  -11
  -12
  -14
  -15
  -16
  -18
  -19
  -20
  -22
  -23
  -25
  -26
  -28
  -30
  -31
  -33
  -35
  -37
  -39
  -41
  -43
  -46
  -48
  -51
  -53
  -56
  -59
  -62
Prev. year cash balance distribution, $m
 
  150
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  359
  218
  231
  244
  258
  273
  288
  305
  322
  340
  337
  357
  378
  401
  424
  449
  475
  503
  532
  563
  595
  630
  666
  704
  744
  786
  831
  878
  928
  980
Discount rate, %
 
  12.60
  13.23
  13.89
  14.59
  15.32
  16.08
  16.89
  17.73
  18.62
  19.55
  20.52
  21.55
  22.63
  23.76
  24.95
  26.19
  27.50
  28.88
  30.32
  31.84
  33.43
  35.10
  36.86
  38.70
  40.64
  42.67
  44.80
  47.04
  49.39
  51.86
PV of cash for distribution, $m
 
  319
  170
  156
  142
  127
  112
  97
  83
  69
  57
  43
  34
  27
  20
  15
  11
  8
  5
  3
  2
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

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.

FINANCIAL RATIOS  of  Encore Capital Group (ECPG)

Valuation Ratios
P/E Ratio 13.3
Price to Sales 1
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 7.9
Price to Free Cash Flow 10.4
Growth Rates
Sales Growth Rate -8.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.3%
Cap. Spend. - 3 Yr. Gr. Rate 19.7%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 502.5%
Total Debt to Equity 502.5%
Interest Coverage 1
Management Effectiveness
Return On Assets 3.2%
Ret/ On Assets - 3 Yr. Avg. 4.1%
Return On Total Capital 2.2%
Ret/ On T. Cap. - 3 Yr. Avg. 2.4%
Return On Equity 13.3%
Return On Equity - 3 Yr. Avg. 12.7%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 77%
Gross Margin - 3 Yr. Avg. 76.8%
EBITDA Margin 23.3%
EBITDA Margin - 3 Yr. Avg. 24.6%
Operating Margin 23.4%
Oper. Margin - 3 Yr. Avg. 26%
Pre-Tax Margin 5.5%
Pre-Tax Margin - 3 Yr. Avg. 9.3%
Net Profit Margin 7.5%
Net Profit Margin - 3 Yr. Avg. 7.1%
Effective Tax Rate 66.7%
Eff/ Tax Rate - 3 Yr. Avg. 42.9%
Payout Ratio 0%

ECPG stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ECPG stock intrinsic value calculation we used $1029 million for the last fiscal year's total revenue generated by Encore Capital Group. The default revenue input number comes from 2016 income statement of Encore Capital Group. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ECPG stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 12.6%, whose default value for ECPG is calculated based on our internal credit rating of Encore Capital Group, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Encore Capital Group.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ECPG stock the variable cost ratio is equal to 59.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $181 million in the base year in the intrinsic value calculation for ECPG stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.1% for Encore Capital Group.

Corporate tax rate of 27% is the nominal tax rate for Encore Capital Group. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ECPG stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ECPG are equal to 9.2%.

Life of production assets of 27.1 years is the average useful life of capital assets used in Encore Capital Group operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ECPG is equal to -14.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $559 million for Encore Capital Group - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 25.602 million for Encore Capital Group is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Encore Capital Group at the current share price and the inputted number of shares is $1.0 billion.

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COMPANY NEWS

▶ Encore Capital Group tops Street 2Q forecasts   [Aug-05-17 01:10AM  Associated Press]
▶ Encore Capital Group misses Street 1Q forecasts   [May-05-17 05:02AM  Associated Press]
▶ New Strong Sell Stocks for March 15th   [Mar-15-17 10:55AM  Zacks]
▶ Encore Capital Group beats Street 4Q forecasts   [06:07PM  Associated Press]
▶ 10 Good Stocks That Are Flying Under the Radar   [Dec-30-16 08:30AM  at Kiplinger]
▶ How Encore Capital Group, Inc. (ECPG) Stacks Up Against Its Peers   [Dec-15-16 09:21PM  at Insider Monkey]
Financial statements of ECPG
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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