The taMale (Encore Valuation)

[ThetaMale]

I will start posting my valuations here for anyone interested in them. I plan on creating a thread for each valuation and expanding on them, and providing updated valuations as I continue to research each company. I try to explain my reasoning for my assumptions, but it's important to point out that it is necessary to make some assumptions, and therefore these should not be seen as a suggestion to invest in a company. The final valuation is prone to serious error and should not be seen as the actual price of the company but as what I believe the company's value might be in the future. These valuations are posted ENTIRELY for educational purposes and are NOT advice.

Now that that's out of the way, this is a financial services company that I have found. This valuation is a rough draft and a starting point for me. I've done some preliminary research on them and their particular industry. They work in debt collection, so most of their income comes from buying defaulted debt and then collecting the payments from the debtors. One thing that interests me about debt collection is that since the debt is purchased at such steep discounts, this allows collection agencies room to re-negotiate the debt and develop a mutually beneficial plan for the debtor and the collector. It's also worth mentioning that collection agencies can take the debtors to court in worst-case scenarios and potentially garnish wages to force debtors to pay their debts. I plan to look into a small list of things: How often do debt collections have to take the debtor to court? How effective is it? In general, rates going up and down lead to more defaults in the short term, while higher rates lead to fewer defaults in the long run, but I'd like to check the impact as this is critical to my current thesis.

Reading through their most recent 10k and several of their 10Qs shows a few positive things to me already. Their vision is "We help make credit accessible by partnering with consumers to restore their financial health." The majority of their revenues come from their call centers and digital collections. There may be monetary incentives, such as legal collections often receiving a lower payout than simply working with the client.

 

[shiv]

Awesome dude! I know some others will definitely hop in this thread and I’ll do my best to contribute as well

 

[ThetaMale]

There is a financial incentive to avoid taking their clients to court. It costs about 10% of the cost of debt in court costs when using the courts to hold debtors responsible.

I'm not one to lean on technical analysis too much, but, interestingly, the stock has over one hundred percent institutional ownership.
There seems to be a decent amount of news stories trying to tout the stock as a good investment. But, of course, this isn't surprising with the level of institutional ownership on this particular stock.

The company's largest concentration of portfolios is within the US, with the types of portfolios they are acquiring being full of more secured debt. The average cost of the purchased debt is 11.5% of the value of the debt. The more expensive the debt, the more likely it is to be repaid, and in recent years Encore has been focusing on more expensive debts. With rising bankruptcies, there is a risk that they may see fewer returns on their obligations. However, they do seem to win a decent amount of their legal cases. As a percentage of their US revenues, they received 40% of their revenues from legal collections.
Recessions impact the company as in previous years; the firm concentrated much of its assets in unsecured debt. I believe the rising costs to acquire the debt are due to increased competition, and the firm may be looking for more secure returns in the coming years. The company purchases debt with forward flow contracts, which are commitments to buy receivables periodically over a specified period per specific criteria, which may include a specifically defined volume, frequency, and pricing.

I plan on looking into this company's ETF exposure over the next few days. The massive institutional ownership is something that could be concerning or could be encouraging. But, for now, I'm still taking a wait-and-see approach. I believe the potential exists, but I'm still not confident about this trade.

 

[weaponoffreedom]

Awesome dude! I know some others will definitely hop in this thread and I’ll do my best to contribute as well

What is this about?

 

[TheRealJohnCooper]

I totally read your name as Tamale.

 

[shiv]

What is this about?

He’s providing input and details on companies that can be traded

 

[Emma tenywa]

I totally read your name as Tamale.

Its a local name here

 

[SmokeHouse423]

I totally read your name as Tamale.

For sure

 

[TheNJNole]

Who doesn't like to look at a good dcf early in the morning....

OP, you come from tMB?

 

[ThetaMale]

ECPG Current ETF exposure is spread among 126 ETFs, with the highest weighting being less than five percent. However, it is worth mentioning that the same firms own several trade funds meaning that the ownership is more concentrated than indicated. Over forty percent of the ETFs are owned or created by only four companies. Those companies are Black Rock, Vanguard, Profunds, and Invesco.

I'll be digging into the actual share amount of this concentration.

This interests me because in the past high concentration of ownership has led to very volatile movements. We can see an explosive action on August fourth that seems to agree with this thesis. On August fourth, the stock's price fell almost twenty percent in a single day.

Remember: Price does not always equal value.

 

[ThetaMale]

Who doesn't like to look at a good dcf early in the morning....

OP, you come from tMB?

I'm aware of it but fuck that place.

 

[quickfeet]

Who doesn't like to look at a good dcf early in the morning....

OP, you come from tMB?

He seems too intelligent for that

 

[quickfeet]

I'm aware of it but fuck that place.

Do you have a career in some sort of finance?

 

[ThetaMale]

What is this about?

I started doing this more for me than you guys. I have developed a process that I go through before making a trade, and I've decided to start posting my research to try and improve on that process. If it starts to muddy up the board, I can stop

 

[ThetaMale]

Do you have a career in some sort of finance?

Nah, I get paid way too much to do nothing all day long, so I spend my time convincing myself that I'm not gambling away my salary on stocks by doing these extended, drawn-out valuations and research.

 

[quickfeet]

I started doing this more for me than you guys. I have developed a process that I go through before making a trade, and I've decided to start posting my research to try and improve on that process. If it starts to muddy up the board, I can stop

Absolutely not muddying up the board. We need good content and posters here

 

[TheNJNole]

He seems too intelligent for that

TMB has all walks. Few other finance bro's, along with some Fortune 500 CEO. Don't discount it.

 

[TheNJNole]

Nah, I get paid way too much to do nothing all day long, so I spend my time convincing myself that I'm not gambling away my salary on stocks by doing these extended, drawn-out valuations and research.

You rep buy / sell side?

 

[ThetaMale]

You rep buy / sell side?

It depends; I fucken love me some theta, so I prefer to sell options, but I like going long equities.

 

[ThetaMale]

TMB has all walks. Few other finance bro's, along with some Fortune 500 CEO. Don't discount it.

They charged me for an extra year on my subscription and refused to refund it. I'm sure there are great people over there, but that left a sour taste in my mouth.

 

[OM JD]

They charged me for an extra year on my subscription and refused to refund it. I'm sure there are great people over there, but that left a sour taste in my mouth.

Better cancel your credit card, otherwise you’ll be a member next year, too. And after that, they’ll figure out your new card number and keep charging you into infinity.

 

[TheNJNole]

They charged me for an extra year on my subscription and refused to refund it. I'm sure there are great people over there, but that left a sour taste in my mouth.

As long as you aren't that homo LFBK or what ever the fuck his name is.

Your TV is interesting in the first analysis.

 

[ThetaMale]

As long as you aren't that homo LFBK or what ever the fuck his name is.

Your TV is interesting in the first analysis.

I actually plan on doing an updated valuation on it by the end of the week. There are some things I want to add in, and somethings I need to discount. I'm debating on how steep to discount their portfolios. They pay nothing for them so they have a good bit of room to re-negotiate and they likely do. If they take the debtors to court they end up losing out on at least 10% of the debt, and what's more they can only take secured debts to court.
I think my next step is to break out those debts that aren't secured and either severely discount them or treat them as liabilities. I just lumped all their portfolios in and discounted them because I'm assuming if they were to get bought out someone would buy up those debts.

 

[ThetaMale]

I'm at a point in my valuation where I have a pretty good idea of $ECPG's growth potential. If the company did nothing to continue growing the company revenues and got shitty leadership in 10 years, I have a valuation of 74.71. However, I find out how well they've managed to grow their collections over the years. They don't pay a dividend, but the company does nothing but grow, and its average growth rate is sustainable. Therefore, the company's value is desirable when adjusting my assumptions to industry and company averages. However, to provide a high number and for fun, I'll show you guys what the value would be if the company managed to maintain its current rates of growth used for assumptions. I have the numbers narrowed down and will post the valuations later today with my explanation for each assumption in the story.

 

[ThetaMale]

Current Expectation

 

[ThetaMale]

The more I dig, the more reasonable, the higher valuations seem to me. However, I try hard to find reasons not to spend money because you never know when an opportunity will come, so I'd love to hear some nay sayer's input.

 

[ThetaMale]

I will wrap this valuation up here with the final story for Encore. It is essential to mention that what matters the most is the company's story. I can play with the numbers and find reasonable-looking numbers for my assumptions, but it is essential that I can assign some sort of logical reason for those assumptions. The final story is what matters and can be used by you to create your model of Encore. If there is anything you disagree with, feel free to comment.
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Encore is in the business of debt collection. Encore buys up old debts and works to collect on them. They gather on these debts through several channels, with online and phone collections the highest. Their stated vision is to help their clients achieve financial independence or some garbage like that. It is fun to get disillusioned with the idea that Encore genuinely cares about its clients, but this is not the case. There is a clear financial incentive for Encore to encourage their clients to achieve financial independence, and that is because if they do, they will manage to collect the total debt amount plus interest. More often than not, Encore can collect the full amount plus interest, but a significant portion of their income is through legal channels. When Encore takes its clients to court, they lose out on at least 10% of the debt that they stand to collect. This loss is not very significant to Encore as they generally buy up the debt for about 10% of the actual price.

Many of their obligations are insecure; however, they have been buying up more secured debts in recent years. These debts have a slightly higher cost, but that is because they are guaranteed repayments.

Over the years, Encore has continually managed to increase the dollar amount of their collections, and in most recent years, they have begun to see a steep increase in that amount. They have demonstrated that they can identify undervalued debts and collect on that difference in value and price. The ability to continually drive the amount of their collections up is Encore's biggest strength and why I am confident in their future growth.

 

[ThetaMale]

Final bump for feedback.

 

[quickfeet]

It depends; I fucken love me some theta, so I prefer to sell options, but I like going long equities.

Describe "theta" to me please. Of course in the context of securities

 

[ThetaMale]

Describe "theta" to me please. Of course in the context of securities

Theta is the rate at which an options price will decay, all else equal. When you buy options, theta is a negative number, and when you sell them, it's positive. As I see it, if you have a positive theta value, you're more or less working with time instead of fighting it. In my mind, when you sell the option, you're taking on a liability, and theta is a credit applied as time marches on. The more time passes, the more theta you get. The risk is the chance that the option gets exercised and your shares get called away, or you end up buying shares of a stock at a higher price than they're listed.

Some people will sell cash secured puts at a price they want to buy shares of a company and sell covered calls at a strike they wish to sell their shares at. You probably won't make as much money this way because the premiums will likely be much lower at strike prices further from the underlying cost, but there's very little risk wheeling theta like this.

 

[quickfeet]

Theta is the rate at which an options price will decay, all else equal. When you buy options, theta is a negative number, and when you sell them, it's positive. As I see it, if you have a positive theta value, you're more or less working with time instead of fighting it. In my mind, when you sell the option, you're taking on a liability, and theta is a credit applied as time marches on. The more time passes, the more theta you get. The risk is the chance that the option gets exercised and your shares get called away, or you end up buying shares of a stock at a higher price than they're listed.

Some people will sell cash secured puts at a price they want to buy shares of a company and sell covered calls at a strike they wish to sell their shares at. You probably won't make as much money this way because the premiums will likely be much lower at strike prices further from the underlying cost, but there's very little risk wheeling theta like this.

Thanks man, I still need to work on understanding this. I need to start looking at the values and then seeing the impact. I always do best with inductive reasoning