Enova International: Dirt Cheap And Oversold On Regulatory Risks

Summary

• Today, we are circling back on Enova International for the first time since November of last year.
• The stock is up some 50% over that time but the company just posted stellar quarterly numbers that seemed to have flown under the radar of the market.
• We update our investment thesis on this fast growing financial name in the paragraphs below.
• Looking for more investing ideas like this one? Get them exclusively at The Busted IPO Forum. Learn More »

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A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”― Mark Twain

The last time we looked in on Enova International (NYSE:ENVA) around Thanksgiving time last year, this 'off the radar' small cap financial name was trading right over $20 a share. At that time, the company had just completed an acquisition that significantly expanded its scope of offerings. The stock has moved up some 50% since then but the firm just posted quarterly numbers that came in significantly above expectations. More upside ahead? A full analysis follows below.

Company Overview:

Enova International is based in Chicago and offers or arranges loans for consumers and small businesses with operations in the U.S. and Brazil. New legislation in the largest market in South America last year significantly improved Enova's ability to electronically fund and collect from their customers. Currently the shares are trading right at $32.00 a share and sport an approximate $1.2 billion market capitalization. Consumer products account for 47% of the company's overall portfolio and small business products represented 53%. The company targets the subprime part of the market, which encompasses just under a third of the individuals in the United States.

Third Quarter Highlights:

The company posted third quarter results after the bell on Thursday. The company earned $1.50 a share, nearly 40 cents a share over the consensus. Revenues soared by 55% to $320 million, besting expectations by over 10%.

Some other highlights from the report:

• Net charge offs across the portfolio fell to 4.2% from 4.7% from the same period a year ago.
• Originations increased 26% sequentially from the first quarter to a record $856 million.
• Originations from new customers increased to a record 43% of total originations, up from 39% from the second quarter and well above 11% in Q3 of 2020.
• Small business revenue increased 18% sequentially and was more than nine times higher than the same quarter a year ago thanks largely to the company On Deck acquisition in 2020 which greatly diversified its offerings.

Source: June 2020 Company Presentation

Also of note, management noted that it had received a Civil Investigative Demand or CID from the Consumer Financial Protection Bureau concerning certain loan processing issues. Given the part of credit market the company is in and regulatory bent of the new administration compared with its predecessor, this is hardly surprising. Management is cooperating fully with the CFPB to get resolved, but this news dinged the stock late this week despite better than expected operating numbers.

Leadership defines their efforts to resolve these issues in the following way on their earnings call following posting quarterly numbers.

The CFPB is investigating handful of issues several which were self reported by an Enova. We have been cooperating fully with the CFPB as we always do. This is a routine process with the CFPB, particularly in our industry. We’ve been through it with them in the past. As a result, we anticipate being able to work with the CFPB to expeditiously complete this investigation."

An article here on Seeking Alpha this summer did a good job laying out the regulatory risks in this industry.

Analyst Commentary & Balance Sheet:

The company gets little coverage from Wall Street but that may change over the next few weeks thanks to quarterly results. Maxim Group maintained a Hold on ENVA in early August. Jefferies reiterated a Buy on Enova on September 2nd with a $41 price target with the following commentary

We see ENVA as well positioned on a relative and absolute basis to drive recovery in loan production, which will drive revenue growth. Demand trends have been choppy since the beginning of the Covid impacts, while uncertainties remain to the lingering effects of C19 along with stimulus. Still, ENVA’s recent guidance suggests a good pickup in growth in 2H despite some of these moving parts—for example if you 'quarterize' loan volumes from the June period it implies strong momentum into 2H21. We also note that 2Q21 saw the highest amount of new customers since 2Q19, which is a good signal that ENVA is marketing effectively to new cohorts, which should drive revenue in the near term as well as the longer term through repeat business."

Following earnings Thursday, JMP Securities reissued its Buy rating and Street high $48 price target on the shares and stated it expected earnings of $2.18 a share in the fourth quarter of this year. I would not be surprised if there is more post earnings follow up from analysts in the next week or so given quarterly results.

As of the end of the third quarter, the company held cash and marketable securities of $306 million and had available capacity on committed facilities totaling $694 million.

Verdict:

Currently the stock is priced at under five times likely FY2021 profits. While there will always be significant regulatory risk from time to time in this industry, that is a huge discount given the company's current and likely continued revenue growth. The overall market multiple is north of 20 times S&P 500 FY2022's projected earnings for example. Given this, I have added some shares to my core holdings in ENVA after the drop, following better than expected third quarter results.

Let me issue and control a nation's money and I care not who writes the laws." -— Mayer Amschel Rothschild

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ENVA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

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[andersonfuller]

A nicely written thesis but you left the negatives about the company to another previously written thesis which helped you paint a rosier picture.

The legislative risks of this company cannot be overstated. Further, if there were ever a time to shut down "predatory lending" (whether you think these companies are predatory or not is neither here nor there) it would be now because we have democrats in the senate and White House.

I am invested in ENVA and this industry so am not a bear, but I think it is disingenuous to skim over what is a massive negative that will likely hang over this company's head until there is a change in the senate's constitution, the president, or a bill is pushed forward which then fails leaving the industry alone for a few years. FYI, Senator Sherrod Brown is pushing for a bill which extends the 36% interest rate cape to all citizens of the US as opposed to just veterans. We must follow it closely to see if it will gain traction.

[Dollarsandcents]

@andersonfuller - I agree with you. However, ENVA is a much different company now compared to just a few years ago as more than half the portfolio represent business loans and therefore outside of any proposed interest cap.