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Encore Capital Group, Inc. (ECPG), Asset Acceptance Capital Corp. (AACC): An Undervalued Stock in the Credit-Services Industry

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In a market at historical highs, it is getting increasingly difficult to find high-quality undervalued stocks. However, Encore Capital Group, Inc. (NASDAQ:ECPG) might be just what value investors are looking for. The company is engaged in consumer debt buying and recovery. It purchases portfolios of defaulted consumer receivables at deep discounts to face value and uses a variety of operational channels to maximize its collections from these portfolios. So, should investors buy shares of the company?

Encore Capital Group, Inc. (NASDAQ:ECPG)

Valuation

The stock trades at below-average valuation with regards to its group, its competitors, and the general market. It currently has a price-to-earnings ratio of just 9.2, slightly better than its also-attractive competitor Discover Financial Services (NYSE:DFS), or than that of Asset Acceptance Capital Corp. (NASDAQ:AACC).

When taking future earnings estimates into account, Encore Capital Group, Inc. (NASDAQ:ECPG) again emerges as a leader: With a forward P/E ratio of only 6.8, the stock has an edge over its competitors (Discover Financial Services (NYSE:DFS)’s is 9.4 and Asset Acceptance Capital Corp. (NASDAQ:AACC)’s is 11.2). The same holds true when taking growth into the equation: Encore Capital Group, Inc. (NASDAQ:ECPG)’s very attractive PEG of 0.6 is better than that of its competitors.

However, while the stock has a good P/B ratio (1.6), Asset Acceptance Capital Corp. (NASDAQ:AACC) does have a slightly better figure (1.3). At any rate, it is clear that the stock is trading at very attractive valuations, and that it’s one of the cheapest stocks in its group.

Analysts

Analysts are mostly bullish on Encore Capital Group, Inc. (NASDAQ:ECPG). The stock currently has an average recommendation of 1.7 (buy-overweight), and an average price target of $38.83, which implies that the stock has an upside potential of almost 40%. Neither Asset Acceptance Capital Corp. (NASDAQ:AACC) or Discover Financial Services (NYSE:DFS) have price targets or analyst recommendations that are as high.

P/E Fw P/E P/B PEG Avg Rec Avg PT (%implied upside)
ECPG 9.2 6.8 1.6 0.6 1.7 $38.83 (+39%)
AACC 18.5 11.2 1.3 1.2 3.0 $7.25 (+11.7%)
DFS 9.9 9.4 2.3 0.9 1.8 $48.12 (+9%)
Edge ECPG ECPG AACC ECPG ECPG ECPG

Competitors

Encore Capital Group, Inc. (NASDAQ:ECPG)’s lead is clear in valuation ratios and analyst ratings, but it is also worth noting that some of its competitors are hardly stocks from which to stay away. With regards to Discover Financial Services (NYSE:DFS), for example, the company has had significant revenue growth, solid stock-price performance, growth in earnings per share, increase in net income and expanding profit margins. As a big player in the financial-services industry, it should benefit from the upbeat environment and the low interest rates, and is likely to do well this year.

Asset Acceptance Capital Corp. (NASDAQ:AACC) is, on paper, slightly more troubled, but will benefit from being bought by Encore Capital Group, Inc. (NASDAQ:ECPG). Combining Asset Acceptance’s investments with Encore Capital’s solid operating and cost advantages should increase profitability for both companies. Encore Capital will acquire Asset Acceptance Capital Corp. (NASDAQ:AACC) for $6.50/share (slightly below the stock’s current price), an equity value of about $200 million.

Price movements

Despite the attractive valuation ratios and the bullish analysts, Encore Capital has not had a good run this year. While as a whole the market is up significantly year-to-date, Encore Capital has lost almost 8% of its value; especially since mid-February. It is now 14.7% off its 52-week high of  $33.07, and 29.7% above its 52-week low of $21.74. Historically, however, the stock is trading near its all-time highs, and comfortably above its financial-crisis lows of 2009 (it was as low as $3.10 in March 2009).

Insider buying

On April 22, Encore Capital’s director Willem Mesdag bought 350,000 shares of the company in the open market at an average price of $28 per share. That is a total purchase price of $9.8 million: Mr. Mesdag has spent almost $10 million of his own money to buy shares.

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