How the Eclipx Group Ltd share price could go gangbusters

In the last three months the share price of salary packaging and fleet management company Smartgroup Corporation Ltd (ASX: SIQ) has rocketed by 60%. This huge gain was down to a combination of Leader of the Opposition Bill Shorten revealing he had no plans to make any changes to the Fringe Benefits Tax and a series of earnings accretive acquisitions.

According to reports in the Australian Financial Review fund managers are tipping industry rival Eclipx Group Ltd (ASX: ECX) to be next to follow on. The catalyst for this is the belief that Eclipx is currently busy preparing for a potential acquisition of UDC Finance.

UDC Finance is the up for auction New Zealand plant and equipment finance business owned by banking heavyweight Australia and New Zealand Banking Group (ASX: ANZ).

Considering the cross-overs that the businesses have I would expect there to be synergies that management would be able to unlock in the event of an acquisition. Much like Smartgroup’s acquisitions, I feel this would be likely to prove accretive to earnings as well.

I believe this bodes well for Eclipx shareholders moving forward and makes the company an interesting investment option today in my opinion. At 24x trailing earnings Eclipx is trading at a discount to Smartgroup, which may be starting to look a touch expensive at 33x trailing earnings.

In its half year results the company posted net profit after tax and amortisation of $26 million, which was a solid 9% increase year on year. Although it isn’t growing profits at as quick a rate as Smartgroup, I believe this potential acquisition could help accelerate the company’s earnings growth.

Personally I think Eclipx is a very strong company which could make a good long-term investment already. I have no doubt this potential acquisition would make it an even better one, but as it is anything but a foregone conclusion I wouldn’t suggest investing in the company solely on the back of this news.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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