• Gary Brode

The Depth Report – Enova International (ENVA) - Tested in Bad Times with Great Risk/Reward


Enova International (Ticker: ENVA) is a specialty finance/fintech company that provides short-term loans in the non-prime space; typically, sub-prime and near-prime. Customers include the large and growing number of consumers and small businesses who have bank accounts, but use alternative financial services because of their limited access to more traditional credit from banks, credit card companies, and other lenders. The company recently acquired OnDeck which focuses on loans to small and medium sized businesses. Given massive unemployment during the Covid-19 pandemic, we would have expected a terrible 2020 for lenders. Instead, Enova had record EPS (more on that below). More importantly, the OnDeck acquisition is turning out better than expected, and if the company comes anywhere close to its projections over the next few years, the stock is incredibly cheap.

Business Overview:

Enova funds line of credit, installment products, and to a lesser extent, short-term loans. These loans can get customers through an emergency, or often, will help a customer pay a rent bill that comes due before their paycheck arrives. For years, we’ve seen stories that 40% of Americans can’t pay for a $400 emergency expense. Enova is a company that these people can turn to when they need to access cash quickly. It’s important to note that in order to qualify for a loan, a customer has to have both a job and a checking account.

In the consumer space, Enova’s Cas$hNetUSA brand provides loans of $150 - $4,000 for 2 weeks to 2 years with fees or interest expense that are 100% - 450% annualized. The NetCredit product provides loans of $1,000 - $10,500 for 6 – 60 months for 34% - 155% annualized. There is also a Brazilian loan division called Simplic that provides loans for 3 – 12 months at 180% - 240% annualized[1]. While that seems usurious, the reality is much less onerous. Imagine a $400 loan for 2 weeks that allows a customer to make a rent payment on time. If that loan carries a service fee of $40, a simple interest calculation gets to loan pricing of around 260%. The interest rate appears high, but paying $40 to make a timely rent payment is probably much cheaper than bouncing a check, and being charged a late fee by the landlord. The customer is paying $40 to avoid much larger fees.

The small business loan space includes the Headway Capital brand which makes loans for $5,000 - $100,000 for 12 – 18 months at 40% - 80% annualized pricing, The Business Backer brand which makes $10,000 - $200,000 loans for 6 – 24 months at 40% - 80% annualized pricing, and OnDeck which makes $5,000 - $250,000 loans for 12 – 18 months at 60% - 99% annualized[2].

There are two aspects of Enova’s business that we believe are significant. First, the high interest rates (including fees) that Enova can charge indicates that the company can tolerate higher losses. The last couple of years (pre-Covid) have seen charge offs in the consumer space in the 13% - 17% range depending on the quarter and business line (3% - 6% for the small and medium business space). A typical bank making 3% - 5% prime rate loans can’t stay in business with those losses. Enova can.

Second, the company operates entirely online. There is a huge advantage to avoiding the expensive rent on physical locations that also need to be staffed during all business hours. Credit decisions are made by computer artificial intelligence, and funds are directly deposited into customers checking accounts. Enova can operate both faster and with a lower expense structure than traditional banking because it doesn’t maintain a traditional physical infrastructure.

Addressable Market: Enova and new acquisition, OnDeck originated $4.7 billion of loans in 2019 and have served approximately 7 million customers[3]. A competing company, CURO, believes the addressable market for alternative consumer loans in the United States is $47 billion[4]. This means there is ample room for growth. OnDeck is serving a different end market than CURO meaning the total addressable market for Enova is larger than $47 billion.

Enova Uses Different Underwriting Procedures from Traditional Banks:

The artificial intelligence underwriting seems to be working well. Charge-offs haven’t been too high given the profitability of loans and return on average equity has been in the 25% - 40% range for the past few years. (2020 was a strange year which we’ll elaborate on later in this report.)

We’ve seen traditional lenders make poor underwriting decisions, and have seen the sector need to be bailed-out every couple of decades (or so). This has made us skeptical of the traditional banking decision making process. We are open to the idea that online lenders like Enova have an opportunity to approach lending differently than it has been done in the past, and to be profitable in ways that traditional banking isn’t.

Here’s the Upside in the Stock:

Enova earned $4.08 in adjusted EPS in 2019 and analysts have estimates of $4.68 in 2021, and $6.27 in 2022. (Again, we’ll discuss why 2020 was an outlier later in this report.) When Enova announced the OnDeck acquisition, the company issued long-term projections of $419MM of earnings for Enova and $28MM in earnings for OnDeck in 2024.[5] We’ve seen estimates of $50MM in cost reductions and another $50MM of revenue synergies, and the last quarterly earnings report shows a share count of 25.6MM. Based on those numbers, we calculate a 2024 EPS of just under $12.

We think something in the $6.00 - $6.50 range for next year is reasonable. To get to our projected $12 in EPS for 2024 would require 25% - 30% annual revenue growth and a small amount of margin improvement. This level of revenue growth would mean a return to the pre-2020 growth rate (please see chart below). The small amount of projected EBITDA margin improvement is likely given the lack of physical infrastructure.

As the chart below makes clear, the revenue growth required to meet estimates is similar to the 21% - 33% we saw in 2016, 2018, and 2019. The projected EBITDA margin would bring the company back in line with the pre-pandemic 2019 baseline. It’s important to note that the chart excludes data from 2020 due to that year being an extreme outlier. Because 2020 had a reduction in the loan portfolio size and a huge reduction in non-performing loans, it’s not representative of future performance.

Similar companies tend to get valued on a multiple of earnings and on book value. Analysts tend to assign a multiple of 6x earnings for companies like Enova. The S-4 gives a list of comparable companies[6] and we used TIKR to look at long-term multiples. In fairness to the sell-side analysts, a number of these companies often do trade at 6x earnings. If that’s the case, the stock is currently fairly valued at the current $32 price. If that’s the right way to look at Enova, there isn’t a lot of excess upside or downside in the stock.

We take a different view. Considering our calculation of close to $12 in 2024 EPS, and assuming 6x is the right multiple, we’d be looking at a stock price of $72 in 2 years. That’s more than a double from current levels. We would expect that this kind of revenue and earnings growth would also lead to multiple expansion. Even a 10x multiple, which would be conservative given this growth rate, would get to a $120 price in 2 years. That’s more than 3.5x the current stock price.

Enova is currently trading at 1.3x book value. Current book value is $25.50. $4.68 in 2021 earnings would be an 18% return on equity. $6.27 of 2022 earnings would be a 21% return on pro-forma equity. (Investors who want to calculate return on average equity will get slightly different numbers.) If Enova can continue to post a return on equity above 20%, the company deserves to trade at a premium to book value.

What this means is that a discount multiple on low earnings gets you to the current stock price. Growth over the next few years combined with a multiple that reflects that growth gets you to a much higher stock price in the next 24 months. That looks like an appealing risk/reward ratio to us.

Enova’s Loan Seasoning Works Differently from Traditional Banks:

Typically, a fast-growing lender shows temporarily low delinquencies and charge-offs. This is because banks don’t lend to people or businesses who can’t make the first few loan payments. It tends to take a while before a bad credit decision shows up in delinquencies. In addition, at a fast-growing lender, because bad debt (delinquencies and charge-offs) is shown as a percentage of total loans, last year’s poor credit decision will be compared with this year’s higher loan amounts. The result is that while the financial institution grows, credit quality will appear better than the reality.

Enova claims the opposite is true for its book of business. Because Enova makes a lot of short-term loans (some as little as 1-2 weeks), the company’s credit statistics don’t get skewed by loan growth. Growing the loan book also means making loans to new borrowers that Enova doesn’t know as well. It turns out that the existing customer base with a payment history has a better risk profile than making loans to new customers. As a result, during periods of faster growth, Enova’s credit statistics decline.

We tested this by charting the last eight quarters of sequential loan growth against the next quarter’s charge-offs. The R-Squared for this is over 65%. Enova is correct that its credit quality during periods of growth move differently than those of a traditional lender. That 65% correlation is partly explained by an extraordinary 2020, a year so strange it deserves its own section.

2020 and the Strange Case of Huge Earnings:

In an effort to try to control the Covid-19 pandemic, governments all over the world shut down their economies. Many feared a giant wave of bankruptcies that would put banks, lenders, and landlords out of business. Enova had a fantastic year, reporting adjusted earnings of $7.26 per share vs just $4.08 in 2019[7].

There were two key reasons for this. First, because so much economic activity had ground to a halt, Enova reduced its marketing budget from $115MM in 2019 to just $70MM. Second, Enova reduced the size of the loan book as it declined to make lots of new commitments into a closing economy. In addition, the credit quality of the existing loan book improved. Government stimulus contributed to Americans’ home balance sheets, and people left without the option of dining out, going to sporting events, or traveling started to save more. Enova’s consumer charge-offs declined from 17.2% in the fourth quarter of 2019 to 5.5% a year later.

It’s important to note that the previously discussed earnings projections assume a return to a more normal charge-off level. 2020’s EBITDA margin of 38% is not sustainable, and we do not assume anything close to that going forward.

A Discussion of Risk:

We’ve outlined above the case for why we think Enova’s stock is inexpensive based on earnings expectations, and we think that if the company comes even close to projections, it should start to trade at an improving multiple of those higher earnings. There are some risks worth discussing, and these risks are the reason that we’re making Enova a medium-sized position instead of a large one.

There is Exposure to the Credit Cycle: Enova’s short-term fee-based loan products are less sensitive to interest rates and the credit cycle than a traditional lender, but between waves of economic shut-downs, massive central bank currency printing, and huge government stimulus programs that may continue or be stopped, there is an element of unpredictability to the environment in which Enova is making credit decisions. What gives us significant comfort here is that 2020 looked like a version of worst-case scenario for the company, and results were excellent.

There is a positive aspect to this as well. We spoke with the Director of Internet Marketing for an Enova competitor, and she noted that we’re at an interesting point in the credit cycle. While 2020 repayments were unusually high due to reduced consumer spending and substantial government stimulus, this left the finance companies with a lot of unproductive cash on the balance sheet. Her thought is that could lead to weak 1Q profits. She also thinks that with the economy starting to reopen, there is a huge amount of pent-up demand.

We agree with her and think that people are eager to start to eat out, enjoy concerts and other entertainment, and to start traveling again. She also thinks that we’ll see a pickup in loan demand in the second quarter of this year. Right now, both the finance companies and the American consumer have great balance sheets, and she thinks we’ll start to head back to a more normalized spending environment and more leveraged balance sheets.

FICO Scores are at an All-Time High: The same Internet Marketing executive told us that American FICO scores are at an all-time high. On the positive side, they’re a good credit risk right now. The negative is that they’ll want better rates. It’s hard to predict whether the promise of lower charge-offs will offset potentially lower interest rates on loans.

Competition is Increasing: The consumer lending space has always been crowded and banks have always competed heavily for customers. One way the alternative lending space has grown is by serving the near-prime and sub-prime customers who were under-banked. Traditional location-based banks and credit unions are now starting to target the non-prime loan business with lower rates and finance charges than Enova and comparable companies charge.

We’re not sure how that’s going to work out for these location-based lenders. On one hand, lower-priced competition would be a negative for companies like Enova. However, it’s not clear that the banks can manage this business well. Mortgage lending tends to have default rates in the low single digits and banks will recover much of the loan value in foreclosure. Auto lending tends to have default rates in the mid-single digits combined with some recovery value. The payday lending space tends to have default rates in the mid-to-high teens and a loan that defaults will return $0. Combine that with the additional overhead of operating and staffing bricks and mortar locations, and we’re not sure that traditional lenders will succeed in this arena. Can a bank make money when its business model requires a loan officer to review and sign a 2-week loan for $40 in fees? We do acknowledge that it’s possible that traditional lenders will both fail and make Enova’s business less profitable.

Another possibility for the traditional banking business is collaboration. We spoke with the former Director of Card Services for an Enova competitor, and he said that the banks don’t have the knowledge or collection capabilities to operate in the non-prime space. He agrees that the traditional banks want to enter the non-prime market due to his belief that there are fewer prime customers, but thinks the banks will partner with alternative lenders to take advantage of their unique knowledge and existing infrastructure.

The CEO Recently Sold Stock: David Fisher, the CEO of Enova, has sold about 40% of his stock in recent months. This issue popped up during our due diligence on the company. As of right now, we do not know the reason for this, and are looking into it. Large insider sales may be a result of a problem at the company, or due to unrelated matters. We note that if Mr. Fisher knows something negative about the company, and is selling stock without making a public disclosure, he would be subject to legal action.

Making Projected Earnings Requires a Return to Historical Loan Growth: In 2018, Enova grew revenue by 33%. In 2019, the company grew that line by 21%. It’s going to have to get back to those levels of growth to make its projections. One thing we find reassuring is that Enova’s projections don’t require a substantial improvement in operating margins. If the company can grow the top line without sacrificing loan quality, it will be enough.

Change to Fair Value Accounting is Less Transparent: Last year, Enova had to change its accounting practices[8]. Previously, Enova would book a loan at its stated value, reserve against likely losses, and recognize profits when received. To Enova’s credit, historical charge-offs have been a close match for loan loss reserves meaning the company did a good job reporting accurately under prior regulations.

The new regulations require Enova to estimate profits and charge-offs at the time it initiates a loan. Now, the company books expected profits when the loan is made. In the 4th quarter of 2020, ENVA showed fair value as a % of principal of 108.6% in the consumer loan division. Booking a loan value greater than 100% indicates the company expects to earn a profit on its loan portfolio.

The new regulations make a certain amount of sense because the company now recognizes expected profit and loss at the time of underwriting. However, the disadvantage of this to investors is that we now see only an aggregate expected profit number. We don’t know how much the company expects losses to be and whether future losses will continue to be a good match for current reserves. Enova still reports charge-offs so we’ll know historical asset quality, but the new accounting regulations force aggregate reporting where we used to get discrete information.

OnDeck Acquisition Seems Good So Far: Enova announced the acquisition of OnDeck in the summer of 2020 and completed it in the 4th quarter. As previously discussed, the acquisition has been better than expected and the loan portfolio is paying off at a higher rate than previously projected. Everything seems to be going well in the newly acquired business. We mention it here because with only one quarter of combined reporting, any hidden liabilities may not have made their way through the system yet. We know of no problems, and will be more confident after a few quarters of combined operations.


Enova is currently trading around $32. If the company achieves its projections, the stock should trade in the mid-$70s in two years (more than double the current price) if it keeps its current discount multiple. We believe that a growth rate that takes earnings per share to almost $12 in 2024 would get the stock re-rated and lead to a stock price in the $120 range (more than 3.5x the current price) in two years. A reopening of the economy, a desire of people to start spending on leisure and travel, and employment growth are all tail winds to the company. We also take comfort in strong company performance in what could have been a disastrous 2020.

We do note concern regarding 1Q loan growth, entry of lower-priced traditional banks and credit unions into Enova’s market, and a much longer than usual risk section as reasons to be cautious. While we believe the risk/reward ratio for the company is favorable, there is more risk of a negative outcome here than in other names we’ve recommended. Our preferred solution in these situations is to control risk with position sizing. We suggest owning the stock with a smaller/medium sized position, and having some dry power available to buy more should 1Q loan growth come in light. We have a two-to-three-year thesis on the name, but no opinion on which direction the next 10% - 20% move is in the stock.

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[1] Company presentation, February 19, 2021, Page 16. [2] Company presentation, February 19, 2021, Page 13. [3] Company presentation February 19, 2021, Page 4. [4] CURO presentation, March 2021, Page 7. [5] Enova S-4, September, 4, 2020, Page 71. [6] Enova S-4, September, 4, 2020, Page 61 and 62. [7] 4Q 2020 Earnings press release, Page 2. [8] This was due to a change in regulations not because of a problem at Enova.

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