Enova: A $56 Stock on Sale for $12 (ENVA)

The market fails to understand how Enova will survive regulatory changes

An interesting situation has developed with Enova International (ENVA), which now presents an insanely deep value opportunity. Enova is the online lending arm of Cash America International (CSH), which spun off 80% of Enova as a public vehicle.

enova-international-enva-185Here’s what its net income growth looked like from 2009 to 2014 (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: $111.7 (48%)

Then the Consumer Financial Protection Bureau and U.K. regulators put a sword through the operation with new regulations. These moves had the potential to cripple Enova and send the stock into single digits. And they almost did — EVNA stock has sold off from $32 to $12.

But, Enova’s previous pain is now a great opportunity for investors. Let’s look at the recent regulations, and why Enova won’t be chained down by them.

Loans in United States

CFPB regulations are going to hurt most payday lenders badly. Enova, however, is so in touch with its analytics that it will know just how maximize revenue from its existing client base, and how to steal clients from lenders unable to become CFPB compliant.

In the meantime, management has moved into three other types of loans.

While payday loans run from $100 to $1,800 (generating APRs of 189% to 450% for 14-60 days), installment loans are $1,000 to $10,0000, at APRs of 100% to 299%, for three to 12 months. Near-Prime loans are offered for the same amounts, with APRs of 35% to 99%, for 12 to 60 months. Business Lines of Credit range from $5,0000 to $30,000 at APRs of 40% to 99% and are open-ended. These are obviously very profitable loans.

However, the CFPB rules will be litigated, for no other reason that the Bureau has never proven the loans are harmful to consumers. If the CFPB rules get overturned, or even loosened, ENVA will return to its former profit levels and growth trajectory, and it will also have all these new lines of credit to offer.

United Kingdom and Elsewhere

The U.K. came down pretty hard on payday lenders, but not as hard as I expected. The average storefront loan in the U.S. costs $16 per hundred borrowed. Enova is state-licensed, so that’s their average as well. The U.K.’s new rate is about $11 per hundred.

However, the number of leading active lenders in the U.K. has fallen from 50 to 30, and Enova believes only a handful will be left standing. That means they should be able to pick up in volume what they’ve lost in pricing.

The Real Reason to Love Enova: Valuation

OnDeck Capital (ONDK) has made $2.5 billion in cumulative loans, is losing money, expects $247 million in revenue this year and is valued at $630 million.

LendingClub (LC) has made $9.3 billion in cumulative loans, is losing money, expects $408 million in revenue this year, and is valued at $5 billion.

Enova stock has made $15.7 billion in cumulative loans, has made $78 million in net income over the past year, and is only valued at $390 million. Total revenue for the year is expected to be between $650 million and $685 million, and EBITDA between $170 million and $200 million.

In the worst of times, lenders like Enova fetch 1x revenue and thus should be valued at $24 per share. In the best of times, this business is worth 4x EBITDA, or $740 million, which is $27 per share.

But there is one more comparison to make. Springleaf Holdings (LEAF) is a non-prime lender, and its risk-adjusted yield is a mere 22%. It generated $238 million in core income last year, and is valued at $6.3 billion — or 26x net income.

Even at the reduced level of net income projected for the year of $70 million, a 26x multiple puts Enova stock’s fair value at $1.85 billion, or $56 per share. That’s at the reduced level!

And yes, that is where I believe Enova stock should be valued, at a minimum. That’s 360% upside from here. As it is, the company is valued at 0.5x sales, and only 5x net income. That’s crazy. The downside is limited here.

I see this as the best deep value play in my purview.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long ENVA and owned March $15 and $17.5 calls. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/enova-56-stock-sale-12/.

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