Thursday, March 17, 2005

plays on the over-extended U.S. consumer

I wrote this maybe 6 months ago, but it still serves as a useful intro to the Distressed Consumer Recievable industry and Asta Funding in general.
One thing that Americans love is buying stuff.  And whether it's a new
pair of shoes, a trip to Alaska, or even a Big Mac, we like to put these
items on our credit card. Acutally paying for these items, though, can cause
a problem. Since 1980, revolving consumer debt like credit cards has
grown at a 12% annual rate, from $55 billion in 1980 to $712 billion in 2002
(source: Federal Reserve). Our payment problems are also evident in
that the annual charge off rate for credit cards has jumped from 3.01% in
1985 to 5.43% in 2002 (source: Federal Reserve). According to The Nilson
Report,an industry newsletter, Mastercard and Visa charge-offs totaled $37.5
billion in 2002 and are expected to reach $72.9 billion in 2005.

One company that has profited from this trend is Asta Funding (ASFI).
[Other competitors in the Distressed Consumer Receivable space include
Encore Capital (ECPG), Asset Acceptance (AACC) and Portfolio Recovery
Associates (PRAA).] Asta generates revenues and profits through
purchases of charged-off credit card debt and other consumer debt. They
typically purchase these pools of debt for 2 to 3 cents on the dollar in hopes of
collecting a few pennies per dollar more than that. CEO Gary Stern
established a target IRR of 30% on his company's acquired portfolios
over a 3-5 year time period.

Whereas Asta utilizes collection agencies and legal channels to
service and collect on its portfolios, they differ from their competitors in
that they have elected to utilize 3rd party providers instead of maintaining
this functionality in house. This strategy enables Asta to keep fixed
overhead very low. While its competitors manage operating margins of
around 40%, Asta checks in with hefty 70%+ margins.

For all of the Distressed Consumer Receivable companies, Wall Street
pays close attention to purchase anouncements and the percent of face value
paid for the purchased portfolios. Purchase announcements are important in
that they indicate new paper for the collectors to work on and the percent
paid helps give some indication of pricing in the market and the discipline
of DCR firms' management. Just recently Asta purchased 3 portfolios with
face values totaling $456 million at a cost of $21.3 million, or 4.7% of the
total. Though this percent paid is higher than its most recent
announcements, CEO Stern is confident in meeting the firm's internal
hurdle rates.

Despite it's strong profitability, 20%+ ROE, operational flexibility
and positive long-term outlook, Asta trades at a steep discount to its
peers. At $18, Asta trades at only about 10 times CY 2005 EPS estimates vs.
14 times for it's peers. I believe that this spread will narrow over
time with Asta ascending to the group multiple.


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1:08 AM  

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