ECN Capital: Transformed, High-Quality Business With Growth Runway

Chris Colvin of Breach Inlet Capital presented his in-depth investment thesis on ECN Capital (Canada: ECN) at Best Ideas 2021.

Thesis summary:

ECN Capital is a great company trading at an attractive valuation, likely due to being underfollowed. Chris gained conviction on his thesis while attending ECN’s 2020 Investor Day. As the latter was not transcribed or webcast, Chris may have a better appreciation of ECN than investors who did not attend the meeting.

ECN was formed through a separation from Element Fleet in Q4 2016. At the time, ECN provided rail and aviation equipment financing, which has limited barriers to entry, slow growth, and high capital intensity. In 2017 and 2018, ECN transformed and high-graded its portfolio by (1) divesting those legacy assets and (2) acquiring three business service providers with significant barriers to entry, high growth, and low capital intensity.

Today, ECN owns an originator and servicer of home improvement loans (Service Finance), an originator and servicer of manufactured housing loans (Triad Financial), and an advisor and manager of credit card portfolios (Kessler Group). These businesses benefit from recurring income, long runways to grow, and difficult to replicate business models. ECN expects the three businesses to drive overall EPS 50+% higher in 2021 as COVID has accelerated growth.

Despite the growth trajectory, wide moat, and an experienced and properly incentivized leadership team, ECN shares recently traded for only ~15x 2020 EPS and ~10x 2021E EPS guidance, as compared to slower-growth peers at ~25 2020 EPS and ~20x 2021E EPS. Furthermore, Chris believes that ECN may raise 2021 guidance at its 2021 Investor Day in February.

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About the instructor:

Chris Colvin, CFA, is the Founder of Breach Inlet Capital. Prior to Breach Inlet, he was the Portfolio Manager at Freeman Group (a family office), where he launched and managed a concentrated public markets portfolio. He also led diligence and was a board member for private equity investments. Before Freeman, he was a Senior Analyst at Highland Capital Management, where he managed a portfolio of distressed credits and a long/short equity fund. He began his career as an investment banking analyst at Stephens, where he also helped evaluate private equity investments. He graduated from Wake Forest University with a BS in Business.

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