Seeking Alpha

Alexander Teicher's  Instablog

Alexander Teicher
Send Message
Analyst at Ithaca Partners, L.P., a multi-strategy hedge fund based in Westport, Connecticut. Ithaca was launched in January 2000, and primarily invests in value, special situation and event driven equities as well quantitative trading. I am a Certified Public Accountant in the State of New... More
  • JGWPT Holdings Inc. - Ripe Fruit On The Peachtree 1 comment
    Jan 9, 2014 8:09 PM | about stocks: JGW

    JGWPT Holdings Inc. ($17.59)

    Background

    JGWPT Holdings Inc. ("JGW") is one of the world's leading purchasers of deferred payments from illiquid financial assets, such as structured settlements, annuities and lottery receivables. The Company operates by collecting the spread between the purchase discount and its financing costs.

    The stock completed its initial public offering ("IPO") on November 7, 2013 at $14.00 and after falling on the first day of trading to as low as $12.82 (down 8.4%), the stock has risen 37.1% since then, and given the significant discount it still trades at relative to comps, the stock has significantly more room to run (30%+).

    (click to enlarge)

    Company Description

    Since 1995, the Company and its predecessors have purchased over $9.1 billion in future payment obligations from customers. The Company drives revenue from the following four "segments:"

    Structured Settlements: These are contractual agreements to settle tort claims involving physical injury or illness. The claimant is compensated for damages through regular payments over time. Every purchase must be reviewed and approved by a judge before settlement.

    Annuities: These are insurance products that entitle a beneficiary to receive pre-determined streams of periodic payments. Unlike structured settlements and lotteries, annuity payments do not require court approval.

    Lotteries: These prizes are usually backed by state lottery commission obligations or by insurance company annuities. Currently, 24 states allow lottery winners to voluntarily assign all or a portion of their future prize payments. Similar to structured settlement payments, each purchase of lottery receivables requires approval from a judge.

    Pre-settlement funding: These are agreements with plaintiffs with pending personal injury claims. JGW will generally advance funds that are less than 20% of the estimated potential proceeds of the claim. Approximately 65% of all lawsuits related to automobile accidents, and the majority of these cases involve a common set of injuries. Unlike other payment streams the Company purchases, JGW carries repayment risk with pre-settlement funding, since repayment is contingent upon the successful settlement of the plaintiff's claim.

    A key piece to the business is generating leads, and as such the Company spends 25 - 30% of its revenues on marketing and advertising, including television, online ads and search engines, social media and direct mail.

    Opportunity

    Firstly, JGW has a strong moat in the structured settlements business with over a 70% market share and a strong brand name with their J.G. Wentworth (you might be familiar with their daytime television ads) and Peachtree (which caters to premium customers) businesses. Additionally, the Company has spent years developing a database of structured settlement holders, which would be very difficult for competitors to duplicate due to the lack of publicly available information.

    Secondly, the Company's expected revenue streams are quite secure as the majority of their revenues (90%+) require court approval, hence there is minimal risk of any potential regulatory or litigation risk post transfer.

    Thirdly, the valuation seems very attractive as the stock is trading at ~40% discount to peers (FNF, FAF, SYA, LEAF, RM, CACC and WRLD) on a P/E multiple, and in light of the positives outlined above, the stock should trade at maximum at a 20% discount if not lower. With a current price of $17.59 there is at least ~31% upside as shown below:

    Upside

     

    Comps Avg. 2014 P/E

    12.52

    Discount to Comps

    20.0%

    Implied JGW P/E

    10.02

    JGW 2014E EPS

    $2.32

    Implied Price

    $23.20

    Current Price

    $17.59

    Upside

    31.9%

    Additionally, there are seven analysts covering the stock, all of which have a BUY rating for an average target price of $20.57 (an upside of ~17%). The targets are also very tight, ranging from $19.00 - $22.00.

    Lastly, like catastrophe bonds, JGW's portfolio is uncorrelated to the credit/business cycle (i.e. lawsuits will occur regardless of macroeconomic issues) and nearly 90% of its counterparties to the structured settlement payment streams are investment grade.

    Risks

    The main risk here is that interest rates will start to rise, which could result in the Company's financing costs growing more rapidly than its asset purchase discount rate, which will certainly hurt earnings.

    Secondly, the Company has so far failed to provide earnings guidance, which might justify a lower multiple.

    Additionally, there are not many direct public comps in the space, which might deter some investors from taking positions and continue to put pressure on JGW's trading multiple.

    Lastly, the Company did declare bankruptcy in 2009 due to a liquidity crunch, which seems to be resolved as they have increased their warehouse facility from one lender and $250M in 2009, to three lenders and $600M today. Nonetheless, some investors might still remain on the sidelines until the stock has proved its staying power.

    Conclusion

    Overall, JGW is a company with a strong, defensible moat and a unique business that should lead to continued financial success. The Company's slightly checkered past (2009 bankruptcy) and limited peer group might turn some investors away; however, that is where the opportunity lies. The stock looks to have at least a 30% upside if not more, and the downside is limited. While it might take a few months for investors to get comfortable with the name, the stock should continue to do well in 2014.

    Disclosure: I am long JGW, .

    Themes: Financial Services Stocks: JGW
Back To Alexander Teicher's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (1)
Track new comments
  • KL Investment Partners
    , contributor
    Comments (306) | Send Message
     
    Very good idea ARTeicher. JGW is a high moat business and is trading very cheap relative to both its existing business and growth prospects. As you suggested, the opportunity exists because it is not a well known company (recent IPO) and on the surface, the business looks a little complicated (with words like "structured settlements"). Over the next 6-12 months, as it has a longer history in the public markets, investors will appreciate the quality of the business and the cheap valuation causing a significant upward valuation re-rating.
    23 Jan, 08:06 AM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.