Citi Moves To The Sidelines On Encore Capital As CFPB Regulation Risk Brings Caution

Citi cut Encore Capital Group, Inc. (NASDAQ: ECPG) to Neutral from Buy and trimmed its target price to $24 from $31, as its contacts say the "CFPB debt collection rulemaking could prove more challenging than we anticipated."

"We also believe the stock will be in the penalty box following its surprise announcement last quarter about a possible European impairment charge (stock down -17 percent the next day and nearly -45 percent since Sept ‘15)," analyst Michael Kaye wrote in a note.

But, Encore's cheap valuation (4.3x '17 estimate) and improving fundamentals has kept the analyst from becoming further bearish on the stock. That said, given the headwinds, Kaye acknowledged that getting incremental investors in to the stock could prove difficult, particularly in a niche sector like debt collection.

Related Link: Encore Pledges $55,000, Est. 350 Volunteers To Support Local Communities Through 4th Annual Global Volunteer Day

"We are starting to see early signs of a modest credit normalization which should benefit ECPG. However, we have yet to see the return of large sidelined card issuers and we wonder if they might not return until the CFPB rulemaking is finalizes," Kaye noted.

Further, the stock could attract downgrades from other brokerages on negative data points, as the sell-side analyst community remains largely bullish on Encore with seven of nine analysts having Buy ratings on the name.

As such, the analyst cut his 2016 EPS view by $0.02 to $5.09 and 2017 EPS estimate by $0.25 to $5.25, to reflect lower revenue from receivables and higher cost to collect. The consensus estimate calls for an EPS of $5.02 for 2016 and $5.50 for 2017.

Shares of Encore were down 4.08 percent at $21.63 at time of writing Tuesday.

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