Last week, Asta Funding, Inc. (ASFI) reported strong Q3 results, as it continues to post a string of robust results, despite the lack of new portfolios on the books. Total revenues rose to $11.6 million, up from $11.3 million a year ago, while EPS fell to $0.21 vs. $0.23 a year ago. The two key nuggets from the report for me are the fact that income from fully amortized portfolios rose to $9.6 million, up 6% y/y, and the fact that the company spent $13.1 million on the repurchase of 1.4 million shares for an average price of around $9.35 a share.
The fully amortized portfolios consist of consumer receivable portfolios that the company has fully collected on. In a simplistic example, if the company paid $10 million for $100 million in face value of receivables, once it collects the $10 million, then the receivables are fully off the company's books even though the company still has the ability to collect on the portfolios up to the face value figure before some adjustments for interest. During the economic crisis, the figure dipped to just above $8 million a quarter after reaching over $11 million a quarter in 2008.
There are a number of ways to estimate the value of the fully amortized portfolios, but with a figure that's strengthening, that's only going to increase the value of this asset that is not accounted for on the balance sheet. I have looked at valuing the portfolios in a number of ways and have concluded that a simple dividend discount model is the best tool to use here.
The assumptions can vary from investor to investor, but I choose to use a five-year dividend discount model with quarterly receivables declining by 4% a quarter (this figure is arbitrary, but this was ASFI's rate of decline during the recession period). I use a tax rate of 40% and start off with a figure of $9.0 million, the trailing twelve month quarterly average. That suggests a value of the fully amortized receivables of about $59 million.
In my assumptions, I include the rest of the assets at book value, while ignoring deferred income taxes, other assets, and furniture and equipment and arrive at a book value of $151 million for the rest of the assets for a total value of ASFI of $210 million. The company has 14.4 million shares outstanding, suggesting a per share value of about $14.50, suggesting upside of about 50% at current prices.
Altering your method of accounting for the fully amortized receivables will greatly alter the fair value of the shares. Including deferred income taxes of $12.7 million, which the company has been using to boost cash flow (falling from $14.4 million as of September 30, 2011), will provide a boost as well. As a bonus, the company's recent investment in personal injury joint venture seems to be off to a good start, with income of $507k for the quarter.
The look into the first point was a lot more in-depth than I had anticipated, however, the second point has merit as well. The company finally began repurchasing shares with authority after announcing a share repurchase program more than a year ago in June of last year. Management held off on repurchasing shares until this quarter. This is good news as management is showing confidence in the fact that the stock is undervalued, and according to my estimates, share repurchases at current prices are extremely accretive to shareholder value.
Looking at publicly traded comps on a price to book basis suggests ASFI is widely undervalued. The biggest competitor, Portfolio Recovery Associates (PRAA), is trading at a P/B ratio of 2.6. Asset Acceptance Capital (AACC) is trading at a P/B ratio of 1.2. Encore Capital Group (ECPG) is trading at a P/B multiple of 1.7. Asta Funding is currently trading at multiple of 0.8.
The EV/EBITDA metric tells a similar story, with ASFI trading at a low multiple of 4.3. That's a market cap of $139 million (share price of $9.65 * 14.4 million shares outstanding) plus debt of $64.2 million minus cash of $110.8 million for an EV of $92.4 million with a trailing twelve month EBITDA of $21.5 million. AACC is trading at a current multiple of 7.2, PRAA is at a multiple of 9.5 while ECPG is at a multiple of 9.4, suggesting significant upside in ASFI (data sourced from Yahoo Finance).
The stock is following the underlying quarterly results, reaching a 52-week high of $9.84 on Thursday. The stock is now up over 25% of the past six months versus a gain of just below 5% for the S&P 500. With momentum and fundamental performance in its favor, additional gains for the stock may come sooner than expected.
Disclosure: I am long ASFI.