Encore Capital Group has been on fire lately. In the past six months alone, the company’s stock price has rocketed 51.4%, reaching $68.34 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Encore Capital Group, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Encore Capital Group Not Exciting?
We’re happy investors have made money, but we don't have much confidence in Encore Capital Group. Here are three reasons we avoid ECPG and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.
Unfortunately, Encore Capital Group’s 3.3% annualized revenue growth over the last five years was sluggish. This was below our standard for the financials sector.
2. Previous Growth Initiatives Haven’t Impressed
Return on equity (ROE) measures how effectively banks generate profit from each dollar of shareholder equity - a critical funding source. High-ROE institutions typically compound shareholder wealth faster over time through retained earnings, share repurchases, and dividend payments.
Over the last five years, Encore Capital Group has averaged an ROE of 7.1%, uninspiring for a company operating in a sector where the average shakes out around 10%.
3. High Debt Levels Increase Risk
Encore Capital Group reported $156.8 million of cash and $4.02 billion of debt on its balance sheet in the most recent quarter.
As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.
With $655.4 million of EBITDA over the last 12 months, we view Encore Capital Group’s 5.9× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.
Final Judgment
Encore Capital Group isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 5.7× forward P/E (or $68.34 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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