Asta Funding, Inc. (ASFI)
- Mkt Price: $7.65
- Mkt Cap: $112.0 mio
- P/E: 10.8
- P/C: 1.02
- P/B: 0.65
Asta Funding’s a NJ based company which purchases, services and collects on charged-off, semi-performing and performing consumer receivables. This strategy offers attractive growth prospects, driven by increasing levels of consumer debt, defaults and use of third party collection agencies. As they say: "Never count out the American consumer." Of course, one can also count on the U.S. consumer to rack up and default on ever increasing amounts of debt! I was shocked to see, especially in the current environment, that Black Friday was the largest ever. But then again, the U.S. savings rate is collapsing again, after a brief recession-induced spike to 8% in 2008. Longer term, this puny savings rate doesn’t bode well for the U.S. Globally, most countries have a savings rate that is a multiple of the U.S. rate …
Asta focuses on distressed credit card and phone receivables. They buy for cents on the dollar, with an average 3.3% (of face value) paid during 2008-10. This reflects the expectation of low collectability, discounted settlements with consumers and, of course, the high cost of collections themselves. Incidentally, Asta paid up in 2011, but this was for (semi) performing medical litigation receivables. This may prove to be an attractive new line of business for Asta. ASFI also maintains a flexible cost structure, outsourcing significant collection work to third party agencies and attorneys. The original founders, Gary and Arthur Stern, are CEO & Chairman respectively. They are Owner-Operators with a long-term and significant aggregate stake of 26.7%.
There’s lots of debate on how to value ASFI and its competitors, complicated by uncertainty regarding valuation of their purchased receivables. Companies approach this more or less aggressively, using the interest and cost recovery methods, each of which present their own risks/issues. With ASFI, a significant portion of income is derived from fully amortized receivables, so I’m reassured on their accounting/valuations. More generally, some debt collectors are better/cheaper than others, but success comes down to what you pay for debt vs. what you ultimately extract. This suggests a Return on Equity valuation approach.
Looking at ASFI’s just released FY 2011 results, we have FY Net Income of $10.5 mio (EPS of $0.71) for a 6.5% RoE. The low RoE reflects a just completed series of impairments ($53, $184 and $13 mio in 2008-10 respectively), and a declining level of purchases ($50, $20 and $8 mio also in 2008-10). Not surprisingly, the impairments were preceded by a high-octane 24%+ RoE in 2005-07. EPS was similarly supercharged, peaking at $3.56 in 2007. Valuations are consistent over time, with P/B at 0.65 today, while ASFI was regularly valued at a 3.0+ P/B during 2004-07.
But what does ASFI’s Leverage look like? Actually, very pretty! Let’s define Leverage as (Total Liabilities less Cash) / (Total Assets less Cash). ASFI has negative Leverage of (23)% due to $108 mio of Cash/Investments. In fact, their $71.6 mio of Debt is non-recourse and secured on their Great Seneca portfolio of $78.3 mio. Excluding this Debt, plus related Asset, we can discern true underlying Leverage to be (153)%. In addition, latest Cash/Investments are estimated at $109.9 mio, giving U.S. a 1.02 P/C ratio. Clearly, we have a Safe and Cheap investment on our hands. How does this compare with Asta’s competitors?
|Encore Capital (ECPG)||500||52%||19.3%||1.4|
|Portfolio Recovery Assoc. (PRAA)||1,143||43%||20.2%||2.0|
|Asset Acceptance Capital (AACC)||108||65%||8.4%||0.8|
We see P/B valuations correlate well with each stock’s current RoE. However, what concerns me is each company’s Leverage, vs. the B/S strength of ASFI. AACC’s the obvious offender, confirmed by their share price falling 40% in the past year. Let’s forget these guys, they endorse our valuation approach but don’t offer an acceptable Margin of Safety.
Another endorsement is the 13.6% stake held by Peters MacGregor Capital Management. They’re a focused (Buffet) value fund from Australia, and ASFI’s a top 5 portfolio holding for them. They may chop the absolute size of their holding, but appear v happy with ASFI’s valuation and prospects. The only issue they have is the recent low level of purchases. I’ve mixed feelings about this: A lack of purchases will ultimately decay earnings, but I’m far more concerned Asta don’t overpay or overreach on purchases.
One can hope they’ve learnt their lesson on acquisitions. In 2007, management pretty much lost their minds (like everybody else) and paid $300 mio for the $6.9 billion (face value) Great Seneca portfolio. This is the only serious management misstep I’ve witnessed, but it almost destroyed the company. Thank God they negotiated non-recourse financing to fund their purchase. Soon enough, impairments were flying thick and fast, totaling $250 mio in the 3 years after 2007. Equity and Mkt Cap collapsed hand-in-hand, with the stock reaching a $1 low. What a price…but at the time Asta’s Leverage looked fatal, making the stock an unattractive buy. Since then, slowly and painfully, Leverage has declined greatly helped by a $53 mio tax refund in June 2010. This tipped Leverage into respectable territory, and a sideways share price since then has offered plenty of chances to build a position.
Management’s hesitancy on new/significant purchases is therefore pretty understandable. Another difficulty is an apparent change in consumer behavior: Historically, mortgage payments always came first for consumers. But with people underwater on their houses, this time ‘round they’ve opted to keep up with their credit card payments and other every-day bills instead. This has delayed a wave of defaulted consumer debt from the 2008 recession. Finally, with the banks so intent on their other problems, they’ve been neglecting this area. Now they’ve raised fresh capital, and may potentially be entering an upswing, they should be keen to shift distressed consumer debt off their B/Ss.
However, management’s now making the right noises about potential purchases. They’ve also announced a significant $20 mio share buyback (but haven’t pulled the trigger yet). They’ve also appointed Gelband & Co. They will assist with a strategic plan, plans to increase shareholder value and plans where Asta is "… actively seeking investments in, or acquisitions of, companies in the financial services industry." Presuming fiscal discipline, all of these will better utilize their Cash pile and increase RoE. I’m also assuming acquisitions will be restricted to receivables or actual debt purchase/collection companies.
One has to wonder if they’d buy AACC ... ? Hopefully not! If ASFI utilized all its Cash (plus a little Debt) to pay 1 times Book for AACC (a 24% premium), Leverage shoots up to 67%. Even if we adjust for non-recourse Debt, Leverage only comes down to 62%. This would be pretty uncomfortable, and a deal too far. However, portfolio purchases from AACC could make perfect sense! And, of course, there are plenty of private companies and portfolios out there for Asta to consider.
Let’s sum up: Asta has an attractive Margin of Safety and trades at a 10.8 P/E. If we exclude exceptionals/impairments, ASFI’s run rate EPS is actually $0.79. Taking this, and stripping out Cash, we arrive at a ridiculous underlying Ex-Cash Adjusted P/E of 0.3! It’s priced at a rock-bottom 0.65 P/B and 1.02 P/C, compared to peak P/B levels of 3.0+. Similarly, it trades at only 2.1 times peak earnings. Finally, it’s a nice hedge to more growth oriented portfolio investments. If the U.S. economy heads south, this creates even better opportunities for ASFI, which is the best capitalized company to scoop up bargains.
This deserves a Fair Value of at least 1.0 P/B, or $11.82 per share, for a 55% Upside Potential. If the stock reaches that level, a continued hold (with stop loss) would be the best strategy in light of prior peak EPS/RoE levels. I’ve 3.3% of my portfolio in ASFI, and may increase to 4%.
- Tgt P/B: 1.0
- Tgt P/E: 16.6
- Tgt Ex-Cash Adj P/E: 5.6
- Fair Value: $11.82
- Upside Potential: 55%