ECN Capital’s Ongoing Strategic Review Weighs on Stock

Q1 2023 results weren’t good and analysts downgraded ECN stock on the disappointment while awaiting the review report

ECN Capital (TSE:ECN, OTCMKTS:ECNCF) reported its Q1 2023 results on May 15. Unfortunately, they weren’t very good. 

The provider of large-scale manufactured home loans, as well as recreational vehicle (RV) and boat loans, delivered adjusted net income of $1.4 million, or 1 cent a share, down 59% from $3.4 million, or 1 cent a share a year earlier. It provides credit portfolios to 90 U.S. financial institutions and also originates, manages and advises on prime credit assets.

The Canadian financing company’s business is slowing down. In the first quarter, it originated $465.1 million in loans, down 8.2% from $506.8 million in Q4 2022. However, they were up 16.9% from $398.0 million a year earlier.

Results from the RV Industry Association’s March 2023 survey of manufacturers determined that total RV shipments ended the month with 31,869 units, a decrease of 50.8% compared to the 64,778 units shipped in March 2022. For the first three months of the year, RV shipments were down 54.3% at 78,600 units.

On a non-IFRS basis, ECN lost $20.9 million in Q1 2023, 164.6% higher than in the fourth quarter and six times higher than a $4.3 million profit a year ago.

“The previously announced Board approved review of strategic alternatives is ongoing and designed to maximize long-term growth and value for shareholders,” said Steven Hudson, ECN’s CEO. “We anticipate reaching a conclusion and announcing results by August when we release our Q2 results.”

Analysts React

Between its deteriorating business due to higher interest rates and the uncertainty of its strategic review, several analysts downgraded or lowered their rating on ECN stock. 

Raymond James analyst Stephen Boland downgraded ECN to ‘market perform’ from ‘outperform’ — the equivalent of ‘buy’ to ‘hold’ — while reducing his 12-month target price by 25% to CAD 3.00. The Toronto-traded shares closed at CAD 2.89 on Wednesday. 

Boland’s estimate for the quarter was 3 cents a share, 2 cents higher than the actual result.

“While recent quarters have been more challenged — reflecting tougher industry conditions — the strategic review remains the overarching theme at play. That said, the slowdown in growth recently has been material,” The  Globe and Mail reported Boland’s comments on the downgrade.  

“While the strategic review could result in upside from current levels, we expect the stock to be negatively impacted should no solution arise. Furthermore, we expect management could reduce guidance in the near future which could put further pressure on the stock. For these reasons, we are downgrading ECN.”

Along with Boland, Cormark Securities analyst Jeff Fenwick dropped his target price on the news to CAD 2.75 from CAD 3.25. Fenwick has a ‘market perform’ rating on ECN stock. 

According to Boland, one positive in the first quarter came from its Triad Financial Services unit, which originates manufactured housing (MH) loans through a network of dealers and manufacturers. 

Triad is selling $110 million in MH loans to institutional investors in Q2 2023. It will sell an additional $190 million over the subsequent months until it has sold $300 million. 

Unloading these primarily variable-rate loans to institutional investors lowers its financing costs and gives Triad more origination capacity.

Fund Buying

Meanwhile, data compiled by Fintel shows a number of fund managers have been buying up ECN stock in recent weeks. 

Notably, decision-makers at mutual fund Vanguard Total International Stock Index Fund (MUTF:VGTSX) bought 2.71 million shares at an average estimated price of $2.61.

Portfolio managers at Private Capital Management, LLC grabbed 15.78 million shares at an average price of $3.22, according to the data. That pushed ECN into the top row of the holdings heatmap, at a portfolio allocation of 3.81%.

Awaiting August

ECN Capital became independent when it was spun out from Element Fleet Management (TSE:EFN, OTCMKTS:ELEEF) in 2016. ECN CEO Hudson founded Element in 2011. Element remains the largest pure-play automotive fleet manager in the world, according to Finpedia.

In 2021, ECN sold its Service Finance business, which provided home improvement loans, to Truist Financial (NYSE:TFC) for $2 billion, nearly seven times what it paid for the company only four years earlier. In addition, Element shareholders received a $7.50 a-share special dividend from the sale. 

ECN launched its strategic review in early March after receiving expressions of interest in one or more of its businesses. Until ECN reports its findings from the strategic review and its Q2 2023 results in August, investors can expect its shares to remain under pressure and relatively volatile.

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