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Encore, Encore Capital Group!

Debt collection is as sustainable as drinking soda


Ever gotten that phone call? You know — “Hi, this is Jane from XYZ Debt Collectors. You owe $500 to ABC Medical Group and they’ve hired us to squeeze it out of you.”

If you haven’t, then you are living up to your obligations. Sadly, many people can’t or won’t live up to theirs. As a result, companies of all sorts have bad debts.

Sometimes they try to collect those debts themselves. Sometimes they outsource that debt collection to an entity that works on contingency. And sometimes they sell the bad debt for pennies on the dollar to Encore Capital Group (ECPG), or my other favorite player in the space, Portfolio Recovery Associates (PRAA). I’ve written about the latter (and am sitting on a 41% return since, thank you), but today the stage is set for Encore.

Encore buys “receivables,” as they are referred to, from credit originators like banks, credit unions, consumer finance companies, retailers, auto finance firms and phone companies. It also scoops up stuff from Chapter 7 and 13 bankruptcies, and works in an interesting area involving property taxes — purchasing the liens and setting up monthly payments.

Buying and collecting debts requires highly specialized skill sets. First, you better have a boatload of analytical methods to determine what receivables to purchase so you buy stuff you can actually collect on. You have to hire collectors who know what practical and psychological triggers get people to pay.

And that’s even if you make contact with the client. Encore called 13.2 million deadbeats in 2012, and only made contact with 23% of them; 3% of people engaged after receiving letters, and an awful lot had to face Encore’s attorneys in court. But Encore takes a generally different approach from standard collection practices. It works with customers not by applying pressure, but by getting them to enter into a payment plan that can last as long as 84 months and is tailored to fit their needs.

It seems to be working. Since 2007, cash collections have increased 22% while the cost to collect has fallen 1,100 basis points. Adjusted EBITDA has increased 27%. In the near-term, collections have increased 17% YOY as of its most recent quarter, increasing revenue 14% over that same time frame, while the cost to collect has fallen 190 bps and adjusted EBITDA risen 21%.

Encore Capital uses debt to finance its receivables purchases. It had some $500 million outstanding under its $975 million credit facility and recently closed some small private placements. That doesn’t include some $300 million available to buy tax liens. Cash flow generated is returned to shareholders or reinvested in new receivables — receivables which now come from all over the world, thanks partially to recent acquisitions in the space.

For those freaking out over the CFPB and its recent public announcement regarding debt collections, there’s nothing to worry about. Careful reading of Director Richard Cordray’s comments make it clear that there is no new rule-making coming down the pike, just vigilant enforcement of already-tight regulations at both the state and federal level.

Not only is Encore Capital in great shape with increasing market share and excellent management, it is one of the few undervalued stocks I’ve been able to find. Analysts predict long-term growth of 16%. On this year’s expected earnings of $3.56 per share, that puts fair value at around $57, and the stock is only at $37.

This is a screaming bargain for a stock that generates as much cash as it does and that succeeds as it does.

As of this writing, Lawrence Meyers was long ECPG and PRAA. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at and follow his tweets @ichabodscranium.

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