Enova (ENVA) is an online consumer-facing lender. Spun-off from Cash America International (CSH) in 2014, the separation created two companies oriented to serving the capital needs of consumers through distinctively different business models; one through a traditional storefront network (Cash America) and the other solely through the internet (Enova).
Since the separation, however, Enova shares have fallen roughly -30%, while its former parent and S&P 500 index have booked gains. Does this signal an investing opportunity?
The Business
Cash America acquired Enova in 2006 when it was a small online lender offering a single product reporting nominal profits. Today, Enova has over $800 million in revenues. Through the use of advanced analytics and product development, Enova now offers a wide variety of loan products in five foreign countries and the United States. Cash America retains a 20% ownership stake in Enova.
The company offers three primary loan products to consumers:
As the lending is conducted over the internet, Enova has developed a proprietary system that leverages over 100 algorithms, 1,000 variables, and 10 years of historical data to make lending decisions. In 3 to 6 seconds, the company’s analytics system pulls data and determines credit worthiness.
This proprietary system is proven to be more predictive than FICO scores and is rapidly improving as more data is collected. Indeed, the company has been able to grow their loan book over several years while experiencing continually lower levels of loan losses.
The company’s unique model has multiple advantages for both the company and the borrower:
These advantages are recognized in borrower satisfaction surveys (shown below). The company is better equipped than most lenders, with 24/7 phone, chat, or email support with an average wait time of <10 seconds.
Management
While most of the management team are new to their roles due to the recent spin-off, most of respectable experience in the financial industry.
David Fisher - CEO
David joined Enova as CEO in 2013. From 2007 to 2012, he served as CFO, President and then CEO at optionsXpress, spearheading the company’s sale to Charles Schwab in 2011 for $1.4 billion (including a one-time dividend).
Arad Levertov - COO
Arad is currently the Chief Operating Officer at Enova, managing all of Enova’s products. Arad has held multiple positions in the International Lending and Strategy & Operations departments since joining in 2009.
Robert S. Clifton - CFO
Robert joined Enova as VP of Accounting in 2011 after serving as VP of Accounting at Ignite Restaurant Group. From 2005 to 2010, he served as SVP of Operations Development, SVP of Finance and VP of Corporate Development and Strategic Activities at Cash America. Robert also held multiple accounting positions at Cash America from the time he joined in 1991.
Ownership
Insiders: It’s a bit concerning that insiders own such a small portion of the company, but the company was only recently separated and none of the current management team has the benefit of founding shares. Still, the parent company Cash America did choose to retain a 20% stake which is encouraging.
Gurus: While the list of current investors should grow as the company garners a longer operating history, both Joel Greenblatt (Trades, Portfolio) and David Dreman (Trades, Portfolio) have nominal positions.
Major Risk: Impending Regulation
ENVA faces major regulatory headwinds in both its primary markets, the US (56% of revenue) and UK (43% of revenue). It is expected that regulatory changes will have a significant negative impact on its financials, both growth and profitability.
The US federal regulator, the Consumer Financial Protection Bureau [CFPB] is expected to issue guidelines affecting payday loan companies in 2015. In the UK, the national regulator, the Financial Conduct Authority [FCA] issued new rules in early 2014 and in November 2014. Some of these rules have already negatively affected the operations of ENVA and some rules will start having a negative impact in 2015.
Valuation
It’s difficult to gauge the company’s earnings power until the full regulatory impact is understood. Still, this uncertainty could have given patient investors a buying opportunity. On a P/S valuation, ENVA still trades near the lower end of its brick-and-mortar peers. This lower valuation is interesting given the company’s higher growth, larger competitive advantages, and growing loan book quality.
Conclusion
There is still a large lack of awareness of this new, relatively small spin-off, with no major sell-side firm research coverage. ENVA has strong and sustainable competitive advantages and it has demonstrated strong growth, high margins, and generated healthy free cash flow. If you can wrap your head around the future impacts of regulation, this could be an intriguing opportunity.
For more ideas like this one, check out GuruFocus’ Spin-Off List or the rest of R. Vanzo’s Articles.
