Cash America's Enova Spinoff Is Another Way to Play Online Lending

Updated from Nov. 4 with the following correction: A previous version of this story incorrectly listed Sequoia Capital as a backer of LendingClub.

NEW YORK (TheStreet) -- Investors may be eagerly awaiting the initial public offering of LendingClub, a peer-to-peer lender funded by the likes of BlackRock (BLK)  and T Rowe Price  (TROW) , but another transaction may prove a more attractive investment when pawn-shop lender Cash America (CSH) prepares to spin off its online lending division, Enova, on Nov. 13. Enova is expected to trade independently under the ticker ENVA.

In a report on Enova published Monday, Sterne Agee analyst Henry Coffey said he foresees "a likely favorable comparison to pending peer-to-peer lending models such as LendingClub." 

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Unlike LendingClub, which has filed with the Securities and Exchange Commission to sell its shares to the public, Enova makes the vast majority of its loans off its own balance sheet. LendingClub and other peer-to-peer lenders such as Prosper Marketplace and Funding Circle Limited connect borrowers with investors who want to lend to them.

LendingClub, whose Board of Directors includes such notables as John Mack, the former Morgan Stanley  (MS) and Credit Suisse  (CS) CEO; Larry Summers, the former Treasury Secretary; and Kleiner Perkins Caufield & Byers executive Mary Meeker, calls itself "the world's largest online marketplace connecting borrowers and investors," according to a regulatory filing. It has facilitated over $5 billion in loans since opening in 2007, including lending more than $1 billion in the second quarter of 2014.

LendingClub says it offers "a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system," contending its borrowers use it "to lower the cost of their credit and enjoy a better experience than traditional bank lending."

Lender/investors, meanwhile, use LendingClub "to earn attractive risk-adjusted returns from an asset class that has historically been closed to individual investors and only available on a limited basis to institutional investors," the filing states.

The main thing Enova and the peer-to-peer lenders have in common is that they conduct business entirely online.

Online lenders "don't have the fixed infrastructure cost of having the actual offline stores and personnel. It's a more scalable model," says Sameer Gokhale, analyst at Janney Capital Markets. That should make these lenders more popular with millennials, and "increasingly they do all of their financial transacting online," Gokhale says.

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What online lenders lack is the "personal touch, where a person walks into a store and you know their personal situation, they live in your neighborhood." As a result, lenders need to be a bit more careful in their underwriting standards, Gokhale says. Still, he concludes "the world seems to be moving online anyway, so there's no point in having offline stores with all the added costs."

Enova lends chiefly to borrowers with lower credit scores than traditional lenders are willing to take on. It has a wide range of products and operates in six markets, including China and Brazil, where it recently begun operations.

Sterne Agee's Coffey believes the shares will start trading at $30 but argues they can pass $40 "in the next six-12 months."

"We think it is time to step away from the more conservative assessment of Enova and begin the process of establishing a value for the shares that more fully reflects the company's historical and expected growth potential and the flexibility of this lender's multi-product, multi-market platform," Coffey writes.

Analysts Coffey and Gokhale praise Enova for investing heavily in compliance, given that regulators such as the Consumer Financial Protection Bureau have been paying close attention to online lenders.

Coffey writes that regulatory risk is "a given," adding "every discussion regarding any consumer lender quickly moves in this direction." But he argues Enova is "ahead of its peers on this front."

Still, there are skeptics about whether Enova will be able to command a higher multiple once it is independent of Cash America. 

"While some may view Enova as a tech company that happens to sell cash (and therefore give ENVA a tech P/E multiple), we view Enova as a lender that happens to be online," wrote Macquarie Securities analyst Vincent Caintic in email correspondence with TheStreet.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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