There is no doubt in my mind that CCP will get to $40. That is not a valuation, nor a 12-month target, it's just a belief.
The hoary rule of thumb that a company can grow at the pace of its ROE times the dividend payout ratio does not currently apply to CCP, so future expectations of such growth should not be used to derive a so-called intrinsic value. With so much cash and borrowing capacity, CCP is capable of seizing opportunistic investments, and historically these (NCML, Baycorp, Collection House book and Radio Rentals in recent years) were soon followed by an increase EPS guidance, and hence SP increases. In earlier years, CCP had acquired two businesses from Keith John of PNC fame, but I know near-nothing about those.
IMO, it will be one or more of these big-bang events that would push the SP over the $40 line, and I think it should happen within 24 months. CCP's cash and borrowing capacity make such investments doable, and CCP's history (NCML, Baycorp, Collection House book and Radio Rentals) suggests it is likely. To this end I'll look into CCP's borrowing capacity.
When firms in this sector refer to debt leverage, it is usually Net debt as a ratio of adjusted EBITDA. I am not sure what the adjustments typically are, but as the range of ratios is wide (between 4x and 2x is considered normal), I'll not get pedantic, especially as CCP now has no debt, and has historically been a conservative borrower, so it is unlikely to borrow as much as it can.
Encore defines the leverage ratio it uses as Net debt / (Adjusted EBITDA + collections applied to principal balance). whatever that implies. Encore's target is a 2x to 3x range. Intrum defines its leverage ratio as Net debt/Full year cash EBITDA. and it is about 4x. Both Encore use bonds as their main source of external funding. CCP does not mention EBITDA, but it is about $110 million, suggesting it could borrow about $400 million if it were inclined to do so.
It is CCP's ability to handle opportunistic deployments of funds, and CCP's history of seizing such opportunities that makes a $40 target SP realistic, and it could happen soon, or not. Selecting 24 months is fairly safe, because CCP would hit that SP within 24 months in the normal course of expanding its existing business, especially expanding in the USA.
CCP Price at posting:
$32.49 Sentiment: Hold Disclosure: Not Held
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