Post by
retiredcf on Nov 10, 2022 10:25am
CIBC
Have a $6.00 target. And make that decline over 60%. GLTA
EQUITY RESEARCH
November 9, 2022 Earnings Update
ECN CAPITAL CORP.
Resetting Expectations In A Challenging Environment
Our Conclusion
ECN Capital reported a disappointing Q3, characterized by a 15% reduction to forward EPS guidance and no meaningful updates on the corporate development front. However, with shares of ECN down nearly 50% since late August we believe that a significant amount of downside is already reflected in the market value of the stock. ECN is clearly no longer priced as a growth story, trading at a P/E multiple of 9.3x based on the midpoint of revised 2023 EPS guidance (before giving any credit for accretive M&A). However, we are revising our price target lower to reflect a more conservative growth outlook and a higher risk premium given the challenging macro backdrop.
Key Points
Earnings slightly below our estimate (ex-Kessler Group). Adjusted EPS
came in at $0.05, excluding the contribution from Kessler Group (“KG”) which was classified as discontinued operations. Our estimate was at $0.09 including KG. Excluding the earnings contribution from KG, our EPS forecast would have been $0.06. The source of the variance appears to be originations that were slightly below our estimate.
Triad impacted by weather-related events in Q3. In ECN’s manufactured
housing finance segment, originations came in at $381 million, which
increased 27% Y/Y but was $40 million below our estimate. Management
indicated that the impact of hurricane Ian and flooding in several states
pushed $20 million to $40 million of origination volume into future quarters. Despite this setback, the company reiterated full-year origination guidance of $1.4 billion to $1.6 billion for 2022.
Marine and RV originations also came in below our estimate. Q3
originations of $298 million were below our estimate of $342 million.
However, management indicated that Q3 volumes came in ahead of plan.
Although our full-year origination forecast was in line with company guidance, we suspect that we may have skewed volumes too heavily into Q3 when attempting to project the seasonal pattern.
2023 guidance revised downward. ECN updated its 2023 outlook, which
entailed a reduction in “organic” (i.e., excluding M&A) EPS guidance from a range of $0.30 - $0.35 to $0.25 - $0.30. This reflected a 15% reduction at the mid-point. Our estimate previously stood at $0.29 (excluding M&A) which we have trimmed slightly to reflect a more conservative stance.
No developments on the M&A front. ECN had previously hinted that
corporate development activity could accelerate in the near future given that letters of intent have been signed with prospective acquisition candidates. Management continues to feel that $0.06 to $0.12 of EPS accretion associated with future transaction activity is within the realm of possibility, but there was nothing announced concurrent with Q3 reporting.