Excellent article and really interesting thesis. The way I see it the regulatory risks will always be there like the sword of Damocles overhanging all subprime lenders. This is something one has to accept if investing in the space and multiples reflect this. However, interested to get your thoughts on recent contingent legal loss provisions in 2020 of $24 million relating primarily to Think Finance spin off and class action lawsuits. Any idea could this balloon higher or not?
They purchased 2.48m shares in 1Q 2021 at an average price of 4.36/share meaning they spent 10.81m$ on shares in the first quarter alone. The subsequent events section of their 10Q they tell us that in April alone they spent another 3.6m$ on 1.159m shares (3.11/share). Under their share repurchase plan, they can only repurchase up to 25m$ of shares per FY.
So, IMO this makes it even more attractive right now. They spent 14.41m$ (58%) of their total authorization in the first four months at an average price HIGHER than the stock is currently trading. They were obviously expecting the price to go much higher following 1Q 2021 but it hasn't. I think the spring proposition is more likely than we think.
I am heavily invested but may put even more in. The stock is just too attractive.
A negative that could be discussed that I want to understand better is the recent overturning of the true lender rule. This was Trump era legislation (passed only in October of 2020 mind you but I think the pass legitimized the process, they were doing it far before) that allowed loans to be originated or sold to banks that are not subject to state usury limits. Therefore ELVT, for example, could bypass Arizona's 36% interest rate cap and charge their regular 100% APR on their loans. Obviously this would drastically lower their earnings potential.
Now, their most profitable line is their new credit card, however, it is still a small piece of the pie. They must have figured out what to do before this and obviously all of their competitors will struggle with this overturning as well (ENVA/CURO) but I would like to know more how this plays out.
I like your thesis. We came to similar figures. Check Joyloon's article on Seeking Alpha (from 2019 mind you) for another great in depth dive into this company.
The downward pressure from Tyler's annoying sales is now soon gone. Where did you find the data that some sales were going into a dark pool with a sizeable buyer on the other side?
Last point - they were willing to pay a price higher than the current share price when the company still had ~44m shares. The company now has 35.7m shares. Say they bought shares at 4.40/share with 44m shares, they thought the company was undervalued THEN at a market cap of 193.6m$. So, that means if shares today were priced at a 193.6m$ market cap despite the lower share count, management would pay 5.42/share now. It's a strange line of thinking, but the depressed share price from massive selling gives it some credence. With more shares, they still bought back at a given market cap. Market cap has shrunk from depressed price and lower # of shares, but they obviously thought the historical market cap was well underpriced, so if we match the market cap to today's share count, we can see what the value of each share today would be as compared to the start of the buybacks in 2019/2020.
Thanks for the detailed commentary, helpful. To answer your question, TCV had a buyer prearranged and lined up on the other side. That’s why there was minimal volatility even though a huge volume order went through. If that was a market sell, stock would have fallen to as low as $1-2 for a hot second.
How can you find such data? Any comments on my second note to my original comment? Makes sense I guess if you see hundreds of thousands if not millions of shares exchange hands with no massive change in price.
How long has current mgmt been in place? Prior to working here what was their track record? This is all to ask...do you think they have the goods to grow ELVT significantly?
They have been together for more than a decade. I think they understand capital allocation well, which automatically makes them above average in my book. Growth is more dependent on macro conditions than mgmt ability per se. They can spend a bunch on marketing to grow, but I’d rather they be prudent unless the ROI on ad spend is there
Hi Plum, are you concerned with the reliability of the current c-suite, given the bankruptcy/lawsuits of TFI and the cross-over between the two management teams. For example, CEO Jason Harvinson singing off on the Chippewa Cree Tribe / ThinkFinance Deals (https://big.assets.huffingtonpost.com/TFPGTERMSHEET.pdf).
Hmm, I’m not too familiar with what went on during Thinkfinance days. Given the BK I’m sure there is dirt that one could dig up. I’m relaxed about it for the most part. I think mgmt. is capable of leading this company based on my interactions with them, despite the fact that there were some execution issues in the past. I think these questions are more relevant for investing in high quality companies that you want to hold for the next 5-10 years. Once ELVT doubles/triples I probably will allocate my capital elsewhere
Did you contact IR/find mgmt. e-mails and cold-contact them? Did that with another play a while ago, $WLFC, was thinking about finding the CEO's e-mail.
Should note the CIO and CEO have recently both been finalists in competitions essentially awarding those who are outstanding in their field (believe Harvison's was for entrepreneur of the year by EY).
Hi Marc, it would depend on market sentiment and what the capital allocation priority is at that point. However, if it only gets to $6.25 as you say, it’s still a very good return from here, and I will be quite happy
Thanks for the write-up, enjoyed reading it! Been doing some work on non-prime lending after coming across FGNA/OppFi. What are your thoughts on "True Lending" legislation and the risk that poses to fin-tech / bank partnerships? The Washington DC AG lawsuit against OppFi, Oppfi subsequently ceasing operations in Washington, and the house recently repealing the previous Trump-era legislation pushes me to think that this is a larger risk than most are currently underwriting. How are you thinking about this with regards to ELVT's relationship with Finwise and Capital Community Bank? Looking forward to the rest of your writeups!
This is a tricky topic and I am no legal expert, so I won’t try to fake a bs answer to appear smarter than I am. So ELVT has historically been credited as being very savvy wrt meeting and navigating around all state and federal level legislation. I admit legal risk is real with this business, so while this is a relatively big position for me, it is not an absolutely huge position. Also, this is all part of the opportunity - if legal concerns were not there, this would instantly trade a turn or two higher, in my view
Thanks for the answer! I do like that their effective APR has declined from ~250% in 2013 to ~100% today and hopefully, this will continue to trend lower as their credit card product grows, minimizing some of the regulatory risks.
Really enjoyed the article, thanks for sharing! Do you believe management when they talk about targeting CAC between $250-$300 for non-Today products? The recent spike is worrying, although they addressed it in their most recent earnings call as being related to lower loan volumes. Looking forward to future articles (also enjoyed JAKK)!
Hi Dan, unfortunately CAC is a little bit of a black box. Not sure how to model or project it accurately other than rely on historical ranges and mgmt commentary. But I don’t think it’s a huge needle mover in terms of volatility we have seen thus far. Obviously if that changes we have to reevaluate
Nope. Addressed it in the writeup. I know that mgmt. has been selling too here and there, but nothing out of the ordinary - they get a decent chunk of annual comp in stock, so I’d expect to continue selling every once in a while
They missed earnings and revised guidance down. Had some credit issues and a lot of noise from a former UK subsidiary (now discontinued). Narrative around the Company changed at that point. Regardless, all those issues are now behind them
Fair question. They intentionally pulled back originations to focus on credit quality, to improve profit margins and cash generation. They were making good progress on this but then COVID hit
Any new thoughts on this?
What do you think is the liquidation/downside scenario if the legislative interest rate cap is passed?
Excellent article and really interesting thesis. The way I see it the regulatory risks will always be there like the sword of Damocles overhanging all subprime lenders. This is something one has to accept if investing in the space and multiples reflect this. However, interested to get your thoughts on recent contingent legal loss provisions in 2020 of $24 million relating primarily to Think Finance spin off and class action lawsuits. Any idea could this balloon higher or not?
They purchased 2.48m shares in 1Q 2021 at an average price of 4.36/share meaning they spent 10.81m$ on shares in the first quarter alone. The subsequent events section of their 10Q they tell us that in April alone they spent another 3.6m$ on 1.159m shares (3.11/share). Under their share repurchase plan, they can only repurchase up to 25m$ of shares per FY.
So, IMO this makes it even more attractive right now. They spent 14.41m$ (58%) of their total authorization in the first four months at an average price HIGHER than the stock is currently trading. They were obviously expecting the price to go much higher following 1Q 2021 but it hasn't. I think the spring proposition is more likely than we think.
I am heavily invested but may put even more in. The stock is just too attractive.
A negative that could be discussed that I want to understand better is the recent overturning of the true lender rule. This was Trump era legislation (passed only in October of 2020 mind you but I think the pass legitimized the process, they were doing it far before) that allowed loans to be originated or sold to banks that are not subject to state usury limits. Therefore ELVT, for example, could bypass Arizona's 36% interest rate cap and charge their regular 100% APR on their loans. Obviously this would drastically lower their earnings potential.
Now, their most profitable line is their new credit card, however, it is still a small piece of the pie. They must have figured out what to do before this and obviously all of their competitors will struggle with this overturning as well (ENVA/CURO) but I would like to know more how this plays out.
I like your thesis. We came to similar figures. Check Joyloon's article on Seeking Alpha (from 2019 mind you) for another great in depth dive into this company.
The downward pressure from Tyler's annoying sales is now soon gone. Where did you find the data that some sales were going into a dark pool with a sizeable buyer on the other side?
Last point - they were willing to pay a price higher than the current share price when the company still had ~44m shares. The company now has 35.7m shares. Say they bought shares at 4.40/share with 44m shares, they thought the company was undervalued THEN at a market cap of 193.6m$. So, that means if shares today were priced at a 193.6m$ market cap despite the lower share count, management would pay 5.42/share now. It's a strange line of thinking, but the depressed share price from massive selling gives it some credence. With more shares, they still bought back at a given market cap. Market cap has shrunk from depressed price and lower # of shares, but they obviously thought the historical market cap was well underpriced, so if we match the market cap to today's share count, we can see what the value of each share today would be as compared to the start of the buybacks in 2019/2020.
Thanks for the detailed commentary, helpful. To answer your question, TCV had a buyer prearranged and lined up on the other side. That’s why there was minimal volatility even though a huge volume order went through. If that was a market sell, stock would have fallen to as low as $1-2 for a hot second.
How can you find such data? Any comments on my second note to my original comment? Makes sense I guess if you see hundreds of thousands if not millions of shares exchange hands with no massive change in price.
How long has current mgmt been in place? Prior to working here what was their track record? This is all to ask...do you think they have the goods to grow ELVT significantly?
They have been together for more than a decade. I think they understand capital allocation well, which automatically makes them above average in my book. Growth is more dependent on macro conditions than mgmt ability per se. They can spend a bunch on marketing to grow, but I’d rather they be prudent unless the ROI on ad spend is there
Hi Plum, are you concerned with the reliability of the current c-suite, given the bankruptcy/lawsuits of TFI and the cross-over between the two management teams. For example, CEO Jason Harvinson singing off on the Chippewa Cree Tribe / ThinkFinance Deals (https://big.assets.huffingtonpost.com/TFPGTERMSHEET.pdf).
Hmm, I’m not too familiar with what went on during Thinkfinance days. Given the BK I’m sure there is dirt that one could dig up. I’m relaxed about it for the most part. I think mgmt. is capable of leading this company based on my interactions with them, despite the fact that there were some execution issues in the past. I think these questions are more relevant for investing in high quality companies that you want to hold for the next 5-10 years. Once ELVT doubles/triples I probably will allocate my capital elsewhere
Did you contact IR/find mgmt. e-mails and cold-contact them? Did that with another play a while ago, $WLFC, was thinking about finding the CEO's e-mail.
Should note the CIO and CEO have recently both been finalists in competitions essentially awarding those who are outstanding in their field (believe Harvison's was for entrepreneur of the year by EY).
from your chart, looks like were at about 1.4x tbv pre covid (Dec 19) => $6.25/share, in line with your DCF. Any reason to think will trade higher?
Hi Marc, it would depend on market sentiment and what the capital allocation priority is at that point. However, if it only gets to $6.25 as you say, it’s still a very good return from here, and I will be quite happy
Yes fair enough, and indeed $6.25 would not be a bad result! many thanks
Thanks for the write-up, enjoyed reading it! Been doing some work on non-prime lending after coming across FGNA/OppFi. What are your thoughts on "True Lending" legislation and the risk that poses to fin-tech / bank partnerships? The Washington DC AG lawsuit against OppFi, Oppfi subsequently ceasing operations in Washington, and the house recently repealing the previous Trump-era legislation pushes me to think that this is a larger risk than most are currently underwriting. How are you thinking about this with regards to ELVT's relationship with Finwise and Capital Community Bank? Looking forward to the rest of your writeups!
This is a tricky topic and I am no legal expert, so I won’t try to fake a bs answer to appear smarter than I am. So ELVT has historically been credited as being very savvy wrt meeting and navigating around all state and federal level legislation. I admit legal risk is real with this business, so while this is a relatively big position for me, it is not an absolutely huge position. Also, this is all part of the opportunity - if legal concerns were not there, this would instantly trade a turn or two higher, in my view
Thanks for the answer! I do like that their effective APR has declined from ~250% in 2013 to ~100% today and hopefully, this will continue to trend lower as their credit card product grows, minimizing some of the regulatory risks.
Really enjoyed the article, thanks for sharing! Do you believe management when they talk about targeting CAC between $250-$300 for non-Today products? The recent spike is worrying, although they addressed it in their most recent earnings call as being related to lower loan volumes. Looking forward to future articles (also enjoyed JAKK)!
Hi Dan, unfortunately CAC is a little bit of a black box. Not sure how to model or project it accurately other than rely on historical ranges and mgmt commentary. But I don’t think it’s a huge needle mover in terms of volatility we have seen thus far. Obviously if that changes we have to reevaluate
Fair amount of insider selling. Concerned?
Nope. Addressed it in the writeup. I know that mgmt. has been selling too here and there, but nothing out of the ordinary - they get a decent chunk of annual comp in stock, so I’d expect to continue selling every once in a while
What happened August 2018 that caused the valuation to nose dive?
They missed earnings and revised guidance down. Had some credit issues and a lot of noise from a former UK subsidiary (now discontinued). Narrative around the Company changed at that point. Regardless, all those issues are now behind them
Their revenue has been slowly declining QoQ even before COVID. How did the narrative change to warrant overlooking a lack of near term growth?
Fair question. They intentionally pulled back originations to focus on credit quality, to improve profit margins and cash generation. They were making good progress on this but then COVID hit