Collector Owes Debt To Experienced Management Team
Investor's Business Daily
biz.yahoo.com
Tuesday July 12, 7:00 pm ET
Steve Watkins
Discipline and patience.
Those are the watchwords for Chief Executive Gary Stern and his company, Asta Funding (NasdaqNM:ASFI). He has more than 30 years of experience in the consumer debt business. His father, 83-year-old company Chairman Arthur Stern, has more than 40 years.
Over time, they've learned a great deal about how to make money by buying bad consumer loans and collecting on them.
"The whole key to this business is purchasing portfolios at an attractive price," Gary Stern said.
The key to that, he says, is to not jump the gun once a portfolio becomes available. Some firms feel pressure to buy, but Asta doesn't.
"The risk is if you buy at too high of a price," Stern said. "We'd rather pass on a portfolio than pay too much."
No Worries
Asta buys portfolios of bad debt, mostly from credit cards, that the lender has written off after failing to collect. It's been in the business for more than 40 years.
That experience helps the firm figure out how much it can expect to collect on a given portfolio.
"A combination of art and science is involved when it comes to looking at and bidding on portfolios," said analyst James O'Brien of Brean Murray & Co.
That's why Stern didn't worry as competition pushed prices up last year.
Three other publicly traded firms focus on the same business: Asset Acceptance Capital (NasdaqNM:AACC), Encore Capital Group (NasdaqNM:ECPG) and Portfolio Recovery Associates (NasdaqNM:PRAA).
Stern's take on the rise in competition? "That does not concern us whatsoever."
For one thing, the bad debt supply keeps growing. Of the $800 billion or so of credit card debt in the U.S., about 6% gets charged off each year, says Steve DeLaney, analyst at Ryan Beck & Co. That puts about $50 billion a year in the market for bad-debt buyers.
A potential end to the strong housing market should help fatten the total even more.
Refinancing and home equity loans have put more money in people's pockets, which means they don't use credit cards as much. When mortgage rates go back up, credit card use should rise again, DeLaney says. Consumer defaults likely will follow suit.
Pricing is getting back to more rational levels, too. Some newer rivals have found that collecting bad debt isn't as easy as it looks.
"The barriers to entry are relatively low," O'Brien said. "But the barriers to compete and be profitable are relatively high."
Asta is the only major consumer debt manager to outsource the collection part of the process, DeLaney says. That keeps overhead low. Asta's costs barely budge even as it buys more debt and its portfolio grows.
"That makes them better equipped to handle a downturn," DeLaney said.
It also eases pressure to buy more debt. If Asta is not finding deals, it can sit back and wait for better deals without piling up heavy costs.
Smooth Operators
Most of the money Asta collects goes straight to the bottom line. The company's pretax margin is 73%. Its net profit margin of 30% easily outpaces its three big rivals, which averaged 21% in the March quarter, DeLaney says.
Asta posted earnings of 51 cents a share during the March quarter, up 34% from the prior year. That compares to gains of 32%, 23% and 45% for Asset Acceptance, Encore and Portfolio Recovery Associates, respectively.
Analysts polled by First Call expect Asta's profit to rise 24% to $1.93 a share for the full fiscal year, which ends in September.
Though Asta traditionally has focused on credit card debt, the company lately has added a lot of consumer long-distance and cell phone debt. Those two sectors made up half of the debt it bought in the March quarter, Stern says.
Asta started buying telecom portfolios about 21/2 years ago. After figuring there was a decent living to be made, it decided to go full bore in the market, CEO Stern says.
"We might buy portfolios in different asset classes in the near future," he said.
Health care and car leasing are two areas that make sense for bad-debt buyers, DeLaney says.
In any segment, Asta aims to double its investment. Buyers of credit card and other bad consumer debt typically pay 3 cents to 5 cents on the dollar, DeLaney says.
One concern for the industry involves the merger mania in the credit card field. Bank of America's (NYSE:BAC) planned buyout of MBNA (NYSE:KRB) is just the latest major deal in the financial industry.
As card issuers get bigger and fewer, they could decide to bring collections in-house, DeLaney says. That would limit the supply of bad debt into the market.
Stern downplays the risk.
"I'm extremely confident that banks will continue to outsource," he said. |
