Enova International (ENVA) hit the NYSE on Thursday. ENVA is a spinoff of the online payday lending division of parent Cash America International (CSH). It’s a particularly intriguing spinoff because it represents the first pure-play in the most lucrative division of consumer finance.
Enova began life some ten years ago under the name CashNetUSA. Cash America bought the company in a steal of a purchase several years ago, paying $70 million for a business that I knew would be worth ten times that number some day.
That day is here, yet the market is saddling Enova with a vicious regulatory discount.
The Consumer Financial Protection Bureau, which publicly has said that, while short-term consumer credit has a role in the economy, the Bureau wants “to make sure that customers…can get the credit they need without jeopardizing or undermining their financial future”.
The CFPB has conducted supervisory exams of all the major players, and has already delivered enforcement actions against Cash America and privately-held Ace Cash Express. It is in the process of making federal rules for payday lending, which are expected to be delivered in the Spring.
Meanwhile, the U.K. is cracking down on consumer lending, and the new regulations may significantly impact ENVA, which generates just under half of its revenue from the U.K.
Uncertainty over what exactly those rules will be, in both the U.S. and U.K., is holding back Enova stock. I think, in the worst case scenario, the stock may be slightly overvalued. In the best case scenario, however, the stock is probably trading at half of what it is worth.
What’s Great About ENVA
Online lending is incredibly lucrative. The benefit of ENVA’s model is that it is state-licensed, so it has all the requisite licensing required by the states. It did not get caught up in Operation Choke Point, which has wiped out most of the online lenders that were operating under models that made loans via offshore entities, tribal entities, or those using a “choice of law” model operating out of Utah.
The data analytics and underwriting by the top online lenders, including ENVA, are incredibly sophisticated. The company has a robust scoring model that minimized defaults while maximizing revenue, and net income strong and growing at an insane rate.
Revenue tripled from $255 million in 2009 to $765 million in 2013, and is likely to cross $1.15 billion this year (Q4 is typically the company’s strongest quarter). Margins expanded from 18.4% in 2009 to 27% so far this year. Net income? Well…net income in millions (with growth rate):
- 2009: $17.7
- 2010: $24.8 (40%)
- 2011: $37.0 (50%)
- 2012: $58.9 (59%)
- 2013: $78.0 (32%)
- 2014 (est.): $149.0 (91%)
Holy EPS growth, Batman!
The 2014 figures come with $480 million in operation cash flow for the first nine months of this year, so the full-year cash flow probably comes in around $650 million.
These are insanely good numbers. And the fun doesn’t stop there.
For the trailing twelve months through September, Enova had net income of $108.9 million and EPS of $3.30. I expect it to end the year with $149 million in net income with an EPS of $3.42. ENVA stock is currently trading just below $24, giving ENVA stock a trailing price-to-earnings ratio of 7.3 … with net income increasing at 91% YOY.
Even if ENVA’s EPS growth throttles down to 25% annually, and we give it a 25x estimate, it should be trading above $75. That’s the best-case scenario, with even higher value possible as it expands into other countries.
Prospective investors are looking at one heck of a regulatory discount.
Outlook for Enova International
So what will happen with the U.S. and U.K. regulations? It is very difficult to speculate. The CFPB is notorious for being tight-lipped and springing surprises on the market. The fear is a limit on the number of loans a consumer can take out each year or something like a 14- to 30-day “cooling off” period between loans, which is effectively the same thing.
The other fear is limiting rollovers to one or two renewals per loan. When Washington State put an eight-loan annual limit in place, half the payday lenders in the state shut down.
The U.K. situation is less hazy, because the proposals are pretty clear: Rates get capped at 0.8% daily, down from the current 0.95%, a cut of about 16%. That’s not too bad, and probably manageable. Enova is very likely picking up consumers who were using online loans from now-defunct lenders, and that may partially offset U.K. revenue cuts.
However, U.K. final rules have not been issued, and ENVA has other compliance concerns over there. ENVA makes it very clear in its S-1 that they could be kicked out of the U.K. altogether.
On the positive side, ENVA is moving into Brazil and China, where regulatory issues are of very little concern.
For now, I suggest you sit on the sidelines. I think, however, most of the regulatory risk is priced in. We’re talking about a stock with 91% EPS growth trading at a PE of 7, after all.
Nevertheless, the market may not see it that way. ENVA is either going to get hammered if both countries go against it, but it could soar if neither puts onerous rules in place.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. 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 pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
