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An interesting situation has developed with Enova International (NYSE: ENVA). The stock has sold off to the point where it has become ridiculously cheap, but because most investors don’t understand the regulatory situation facing the company, or how the company is adapting, there is reluctance to buy up a clear value opportunity.
Enova is the online lending arm of Cash America International (NYSE: CSH), which spun off 80% of the entity as a public vehicle. It was phenomenally profitable.
Revenue tripled from $255 million in 2009 to $765 million in 2013. Margins grew from 18.39% in 2009 to 27% in mid-2014.
Net income, listed below in millions (with growth rate), had been tremendous:
- 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 got involved, severely restricting these loans. Enova stock has sold off from $32 to less than $12.
But a funny thing happened on the way to the ATM. Enova has been adapting to these rules. I believe that no matter how things turn out, Enova is going to not only survive, but thrive.
That’s because management has shifted away from just the standard, single-payment payday loan. They are incredibly lucrative. Payday loans typically range between $100 and $1,800, generating annual percentage rates of 189% to 450%, for 14-60 days. For now, those loans are still being offered here in the U.S. until the CFPB rules are resolved.
Enova’s underwriting is also incredibly robust. As loan balances have increased over the past four years, loan loss provisions and net charge-offs declined from about 25% to 15% of principal.
CFPB regulations are going to hurt most payday lenders to a very large extent. 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.
I don’t believe Enova’s business under the new rules will be anywhere near as profitable as it is now. It’s unclear just how much of a difference there will be. In the meantime, management has moved into three other types of loans.
Installment loans are for $1,000 to $10,0000, at APRs of 100% to 299%, for three to 12 months. Near-prime loans are for the same amounts, with APRs of 35% to 99%, for 12 to 60 months. Business lines of credit are for $5,000 to $30,000, at APRs of 40% to 99%, and are open-ended.
Look at the returns on these loans and you can see why – after Enova expands into these markets – that profits are not going to be an issue in the U.S.
There’s another potential positive catalyst. While the CFPB’s payday lending rules are expected to be implemented in early 2017, there will be legal challenges. There are numerous legal issues surrounding these rules, not to mention the very constitutionality of the bureau itself. One primary hole in the CFPB’s arguments for these restrictive rules is that the bureau has never been able to prove consumer harm from the products.
If the CFPB rules get overturned, or even loosened, not only will Enova return to its former profit levels and growth trajectory, but it will also have all these new lines of credit to offer as well.
A Deep Value Play
In terms of valuation, it’s instructive to look at Enova versus its peers in the lending space.
OnDeck Capital (NYSE: ONDK) has made $2.5 billion in cumulative loans, is losing money, expects $247 million in revenue this year and is valued at $657 million.
Lending Club (NYSE: LC) has made $9.3 billion in cumulative loans, is losing money, expects $408 million in revenue this year, and is valued at $5.1 billion.
Springleaf Holdings (NYSE: LEAF) is a non-prime lender, and its risk-adjusted yield is a only 21.9%. It generated $239 million in net income last year, but the market values it at $6.29 billion, or 26 times net income.
Enova has made $15.7 billion in cumulative loans, has made $97 million in net income over the trailing 12 months, and is only valued at $330 million. 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 represents 360% upside from here. As it is, the company is valued at 0.5 times sales, and only 5 times net income.
Enova is a great deep value stock for patient investors.
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