Asset Acceptance Capital Corp. (AACC) rose more than 14% on Wednesday on volume 13x average as investors are finally coming around to the name following the downturn in the economy.
Asset Acceptance Capital Corp has been in business nearly 50 years buying charged-off debt. The company buys charged-off receivables from consumer credit originators at pennies on the dollar and attempts to collect on overdue debt. The consumer credit originators primarily include credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications, and utility providers, as well as resellers and other holders of consumer debt.
The company was forced to take significant write downs in 2008 and 2009 as the rate of collections slowed considerably in light of the economic downturn. In 2009 alone, the company had net impairments on its portfolio of more than $49 million. However, in 2010, and so far in 2011, the portfolio has performed a lot better.
This year, AACC is on pace to record its first profitable year since 2008. For Q3, the company reported EPS of $0.10 vs. $0.14 a year ago but excluding items, the company saw an improvement in EPS to $0.14 vs. ($0.02) in 2010. AACC attributed the improvement in results to continued momentum in collection growth, improved operating expense base, and operating efficiencies.
The market for charged-off receivables is competitive and active. It has a number of participants. AACC purchases its portfolios on this market. Therefore, the book value of these charge offs will be about what the company can receive if it decided to sell them to another debt collector. This stands true unless, of course, the economy suffers another downturn or upturn, for that matter. Either change would drastically alter the rate of collection on the charge-offs.
AACC is currently trading at around its tangible book value. Nearly all of the company’s assets are in its accounts receivable portfolios, which were valued at $348 million as of the end of Q3. However, the $348 million is not the full value of the company’s portfolios. Just like Asta Funding, AACC not only collects on portfolios on its balance sheet, but also collects on portfolios that have already been fully amortized and collected on. Once the purchase amount of a portfolio has been recouped, the value of the portfolio falls to zero. However, the face value of the portfolio is a small percentage of what it is on the books for. Therefore, the company can keep collecting on those portfolios even if it has a zero value on its balance sheet.
Over the past four quarters, the company has collected $49 million on its fully amortized portfolios, for an average of just over $12 million a quarter. After adjusting for the recovery cost and taxes, I estimate that the fully amortized portfolios are worth about $50 million on the open market or about $1.62 per share outstanding. Taking that into consideration, gives the stock upside of nearly 50% from today’s levels.