Asta Funding Is Finally Breaking Out As Cash Continues To Pile Up

May.16.12 | About: Asta Funding, (ASFI)

Asta Funding (NASDAQ:ASFI) was discussed on Seeking Alpha numerous times last year as the value in the stock has been too much to ignore. The story still hasn't changed from last year but the stock has started racking up some gains even though the market is heading south.

For some background, ASFI is a leading consumer receivable asset management company that specializes in the purchase, management and liquidation of performing and non-performing consumer receivables. Asta generates revenues and earnings primarily through the purchase and collection of performing and non-performing consumer receivables that have typically been either charged-off by the credit grantors or not considered to be prime receivables. These receivables include MasterCard, Visa and other credit card accounts issued by banks and other consumer loans issued by credit grantors. Asta may also purchase bulk receivable portfolios that include both distressed and non-conforming loans.

Investors have left the company for dead as ASFI has backed off purchasing new written off 3rd party receivables as prices rose. Taking that trend to the extreme, the market has assumed that the company is winding down its operations as all it was doing was winding down its current portfolios, store its cash in the bank, and pay a small dividend. And even though that more or less has been the case, the valuation the market has been assigning the company has been completely off. Taking a quick look at the balance sheet shows that the company is sitting on about $117.5 million of cash, $101.8 million in receivables inventory, $7.7 million in recent investments, and about $2.5 million in accounts receivable for an asset base of $229.5 million and liabilities of $69.6 million for a net worth of $159.9 million. Already that's more than the market value of the equity which is about $130 million. Then taking into account the value of the fully amortized receivables, which I conservatively estimate is about $55 million, we arrive at a company value of $215 million or about $13.50/share. That is upside of over 60% from today's prices.

Fully Amortized Receivables Calculation

The value of the fully amortized receivables is one that requires some guess work. The data provided by the company is the value of the collections from fully amortized receivables per quarter. Asta Funding has averaged $8.9 million in collections per quarter from fully amortized receivables over the past year. Over the past two years, it has averaged $8.9 million per quarter and $9.0 million per quarter over the past three years. The collections have pretty steadily been between $8 and $10 million. The lowest figure over the past 3 years was $8.1 million in the December quarter of 2009.

I have assigned ASFI an equity discount rate of 10% with a tax rate of 40%. I have very conservatively assumed that these portfolios will last only 3 more years, however, ASFI can keep collecting on them until the face value of the portfolios have been received. I have assumed that the company will continue collect $8.9 million per quarter, the average collections per quarter over the past year. I previously assumed that fully amortized collections would decline 4% a quarter but the company continues to put up strong numbers so I adjusted my estimate. Applying the discount rate and tax rate, brings a value of the portfolios to about $55 million. Below is the data I collected from the company's filing documenting its collections from ASFI's fully amortized portfolios.

Disclosure: I am long ASFI.