Encore Capital Inc. (NASDAQ: NASDAQ:ECPG) has received an upgrade from Northland, shifting its stock rating from Market Perform to Outperform.
The firm also set a new price target for the company's shares at $58.00. The positive adjustment comes in response to a series of favorable conditions observed in the company's operating environment.
The analyst at Northland cited a "robust purchase environment" as one of the key drivers behind the upgrade. This environment is characterized by a strong pipeline of credit card delinquencies and net charge-offs. These factors are indicative of potential growth in the company's core business of debt collection.
Furthermore, the analyst noted improvements in the collections environment, with the second quarter of 2024 marking the first "clean quarter" in terms of collections in nearly two years. This milestone suggests that Encore Capital has overcome some of the operational challenges it faced and is now positioned to capitalize on a more stable collections landscape.
Additionally, the valuation of Encore Capital was highlighted as attractive. The firm's shares are currently trading at a multiple of 6.0x to 6.5x forward GAAP earnings per share (EPS), which the analyst believes offers a compelling entry point for investors considering the stock's future earnings potential.
In other recent news, Encore Capital Group reported robust growth in Q2 2024, driven by significant increases in collections and portfolio purchasing. The company set a deployment record with $237 million in the U.S. through its MCM business and raised its 2024 guidance, expecting to surpass $1.15 billion in global portfolio purchasing and projecting an 11% year-over-year increase in collections to over $2.075 billion. Truist Securities adjusted its price target for Encore Capital shares to $64.00, down from the previous $70.00, due to legal and competitive issues, but maintained a Buy rating.
Additionally, Encore Capital's aggregate yield increased by 3 basis points sequentially in the second quarter to 9.05%, supported by the estimated collections multiple on the 2024 paper, which remained stable at 2.3 times. The company's effective interest rate for the 2024 U.S. vintage was 3.6%, surpassing the 3.3% for the 2023 paper and the overall rate of 3.0% across all geographies and years.
However, competitive market conditions persist in Europe, leading to a more selective portfolio purchasing strategy. The company also noted increased legal collection expenses due to the uptick in U.S. purchasing activities. Despite these challenges, Encore Capital plans to redeem its 2025 euro notes and 2026 sterling notes.
InvestingPro Insights
Adding to Northland's optimistic outlook on Encore Capital Inc. (NASDAQ:ECPG), recent data from InvestingPro provides additional context to the company's financial position and market performance.
Despite the challenges noted in the article, InvestingPro data shows that Encore Capital's revenue grew by 7.92% over the last twelve months as of Q2 2024, reaching $1.27 billion. This growth trend is further emphasized by a 9.98% quarterly revenue increase in Q2 2024, aligning with the analyst's observation of a "robust purchase environment."
InvestingPro Tips highlight that Encore Capital's net income is expected to grow this year, supporting the analyst's positive stance on the company's future earnings potential. This expectation of profitability is particularly noteworthy given that the company was not profitable over the last twelve months, as another InvestingPro Tip points out.
The company's financial health is further underscored by an InvestingPro Tip indicating that Encore Capital's liquid assets exceed its short-term obligations, suggesting a strong balance sheet position that could support its growth initiatives in the improving collections environment.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips for Encore Capital, providing a deeper understanding of the company's financial outlook and market position.
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