Stock Analysis

Do Encore Capital Group's (NASDAQ:ECPG) Earnings Warrant Your Attention?

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NasdaqGS:ECPG
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Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Encore Capital Group (NASDAQ:ECPG). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

Check out our latest analysis for Encore Capital Group

How Quickly Is Encore Capital Group Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. Impressively, Encore Capital Group has grown EPS by 25% per year, compound, in the last three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. I note that Encore Capital Group's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Encore Capital Group shareholders can take confidence from the fact that EBIT margins are up from 33% to 36%, and revenue is growing. That's great to see, on both counts.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

earnings-and-revenue-history
NasdaqGS:ECPG Earnings and Revenue History December 24th 2020

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Encore Capital Group.

Are Encore Capital Group Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

Like a sturdy phalanx Encore Capital Group insiders have stood united by refusing to sell shares over the last year. But the bigger deal is that the Independent Director, Wendy Hannam, paid US$78k to buy shares at an average price of US$31.01.

On top of the insider buying, it's good to see that Encore Capital Group insiders have a valuable investment in the business. Indeed, they hold US$17m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 1.5% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

Should You Add Encore Capital Group To Your Watchlist?

For growth investors like me, Encore Capital Group's raw rate of earnings growth is a beacon in the night. The cranberry sauce on the turkey is that insiders own a bunch of shares, and one has been buying more. So it's fair to say I think this stock may well deserve a spot on your watchlist. Even so, be aware that Encore Capital Group is showing 1 warning sign in our investment analysis , you should know about...

The good news is that Encore Capital Group is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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