What a time it’s been for Encore Capital Group. In the past six months alone, the company’s stock price has increased by a massive 43.4%, reaching $80.14 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Encore Capital Group, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Encore Capital Group Not Exciting?
We’re glad investors have benefited from the price increase, but we’re cautious about Encore Capital Group. Here are three reasons why there are better opportunities than ECPG, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.
Unfortunately, Encore Capital Group’s 2.6% annualized revenue growth over the last five years was sluggish. This was below our standards.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Encore Capital Group’s weak 3.7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. High Debt Levels Increase Risk
Encore Capital Group reported $227.2 million of cash and $4.03 billion of debt on its balance sheet in the most recent quarter.
As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.
With $709.6 million of EBITDA over the last 12 months, we view Encore Capital Group’s 5.4× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.
Final Judgment
Encore Capital Group isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 6.7× forward P/E (or $80.14 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better investments elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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