Overview:
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.

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