The companies that actually stand to benefit from the sub-prime implosion are the credit and debt recovery and collections companies, with some caveats of course. First, they will not do well if the sub-prime meltdown turns into an outright general debt default malaise that protrudes into the lower and middle tiers of of Prime-lending. They also will not do well if the general employment situation begins to drop off because if those who are late pay and in default are also unemployed then they won’t be able to squeeze blood from a rock. The sub-prime implosions also need to be monitored in the "actual defaults" of mortgages (rather than delinquincies) because the last thing people will let go of is their house. Cars, credit cards, store credit debt, and the like can all fall apart; but that house is the last thing to go and people will even revert to Ramen noodles for 3 meals a day before walking away.
There are also some key stock issues to consider. Investors prefer large cap stocks in down markets as the defensive plays out there, and these are all under $1 Billion in market cap now. None of these pay a dividend either, so in one sense they could have some safety-net investors stay away. They are all profitable and the Wall Street analysts expect them to remain profitable this year. Here are the three main pure-plays in the sector, but keep in mind that many of these companies compete against dozens of private companies or subsidiary companies of larger public companies:
Portfolio Recovery Associates Inc. (PRAA)
$43.53; down $1.46 on day; year range $38.23 to $52.98
Market Cap: $697.16M; NO dividend
Portfolio Recovery Associates provides outsourced receivables management and related services. It purchases, collects, and manages portfolios of defaulted consumer receivables and accounts receivable. The defaulted consumer receivables are the unpaid obligations of individuals to banks, credit unions, consumer and auto finance companies, and retail merchants. It also provides various collection services, including collateral-location services for credit originators, fee-based collections, and audit and debt discovery/recovery services for government.
Asset Acceptance Capital Corp. (AACC)
$15.08; -$0.45 on day; year range $14.03 to $21.42
Market Cap: $538.9M; NO Dividend
Asset Acceptance Capital engages in the purchase and collection of defaulted debt and charged-off accounts receivable. It acquires these receivables from consumer credit originators such as credit card issuers, consumer finance companies, merchants, telecommunications, utilities, and other resellers of consumer debt. The company also sells these receivables to unaffiliated companies for collections.
Encore Capital Group Inc. (ECPG)
$9.40; -$0.18 on day; year range $8.87 to $17.92
Market Cap: $215.29M; NO Dividend
Encore Capital Group buys and manages charged-off consumer debt from credit cards, auto loan deficiencies, general consumer loans, and telecom and healthcare receivables. The company provides bankruptcy services to the finance industry including negotiating bankruptcy plans, monitoring and managing the consumer compliance with bankruptcy plans, and recommending courses of action to clients when there is a deviation from a bankruptcy plan.
As a reminder, just because these are supposed to beneficiaries doesn’t imply that they automatically win. As you can see these stocks are all down with a 200 point drop in the DJIA for the day. If there are major waves of defaults then they will end up with much larger portfolios that have lower and lower chances of collection as time goes on. These are all down well off of their highs, so just because Jim Cramer says that PRAA has the mechanisms in place to make exponential returns on collections doesn’t mean these all automatically win.
Jon C. Ogg
March 13, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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