Asset Acquisitions Could Benefit Players in the Debt Collections Industry

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Asta Funding (NASDAQ: ASFI) is a receivable asset management and liquidation company.  It purchases and collects performing and non-performing consumer receivables that were charged off or considered non-prime receivables.   In addition, Asta invests in funding personal injury claims and is increasingly looking outside its core focus for more attractive returns.

Asta Funding has a significant cash position of $106 million, or $8.19/share, to fund additional investment with.  Debt at the end of CY12 was $58.8 million, or $4.54/share.  The stock trades at $9.47.  Its returns are below those of competitors, which is discussed later.  Asta Funding’s ROA is 4.18%, ROE is 5.88% and ROI is 4.23%.

Regulatory agency will lead to industry consolidation

The newly created Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission are charged with creating rules and regulations for the consumer debt collection industry.  As part of Dodd-Frank, the agency was granted regulatory oversight of the industry.  Previously, collection agencies have not had any agency to answer to.  A recent article from Bloomberg highlights how certain debt collectors are using social media like Facebook to contact debtors, which is an obvious overstep.

The increased regulatory burdens from the CFPB will likely lead to consolidation in the now fragmented industry.  Management teams in the industry indicated this should create opportunities for acquisitions and asset purchases by larger, more efficient firms like Asta Funding.  Some large sellers of receivables have already started to only deal with larger collection agencies that they believe are better positioned to deal with the new regulations.  Low-debt levels and excess cash should allow Asta Funding to participate in these opportunities.

Competition

Portfolio Recovery Associates (NASDAQ: PRAA) is one of the dominant players in the collections industry with a market cap of $1.86 billion compared to Asta Funding’s of $122.6 million. Portfolio Recovery also has superior return metrics to Asta Funding.  According to Google Finance, Portfolio Recovery’s return metrics are on 9.79% on assets, 18.56% on equity and 10.28% on investment.  Portfolio Recovery has a debt to equity ratio of 37%, similar to Asta Funding.  Portfolio Recovery is known for good price discipline in buying assets.

Encore Capital Group (NASDAQ: ECPG) is another large competitor also with better return metrics compared to Asta Funding.  It has a return on assets of 7.87%, return on equity of 18% and return on investment of 8.2%.  That said, Encore Capital has a debt to equity ratio of 105% which will hinder their ability to acquire significant assets in an industry consolidation.

Valuation

Asta Funding trades at a discount versus its peers if we adjust for the excess cash balance.  In the above discussion, lower return on its investment versus Portfolio Recovery and Encore Capital explains the discount.  However, it does have more cash and can add more leverage than Encore Capital to invest in asset purchases and improve future returns. 

To view a comparison chart of the company's metrics here.

 Conclusion

Asta Funding stands to benefit from changes occurring in the industry.  The company has had a hard time finding assets to buy in its traditional space with good returns.  While the firm has and continues to look outside of collection accounts, the excess cash on balance sheet should benefit them.  The changing regulatory dynamics should create those opportunities for Asta Funding and make it worth watching going forward.


mthiessen has a long position in ASFI. The Motley Fool recommends Portfolio Recovery Associates. The Motley Fool owns shares of Portfolio Recovery Associates. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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