Banks and credit companies make their money by extending financing to people like you and me. And if we're late in making our payments there is a whole separate group of companies just waiting to put the squeeze on. They're called debt collection companies.
Given the state of the economy and the risk of growing loan defaults, I suspect we'll all be hearing a little bit more about debt collectors in the future. (For help avoiding the call of a collection agency, see Digging Out Of Personal Debt.)
We've Come For Your Debts
Collection companies are entities that will collect another company's debt in return for a percentage of the amount it recovers and/or a fee. Debt collection firms offer their clients one major advantage: their entire focus is on collecting debts. Many corporations can't afford to spend all of their time trying to collect on stale receivables. It's simply too time consuming and costly.
There are other advantages to hiring debt collectors as well.
For example, the people who are employed by collections companies are trained to track people down using a variety of resources. They also have a reputation for being persistent and are usually trained to highlight the risks of not repaying debt to the consumer and talking them into repaying their debts. Again this is considered to be an extremely valuable service especially for corporations that have accounts receivable problems.
Two Big Names In Collections
Asset Acceptance Capital Corporation (Nasdaq:AACC)
This is an interesting company. It purchases receivables written off by lenders (hopefully at a low price) and then makes its money by collecting on those debts. Recent news hasn't been great, however.
In the third quarter ended September 30, despite reporting a more than 12% growth in cash collections, the company reported a loss of 5 cents per share. This is a significant drop from the 29-cent-per-share profit it booked in the comparable period last year. The problem is it had to spend a ton of money on legal expenses to collect those debts.
The future looks bright for Asset Acceptance Capital Corporation. According to analysts polled by Thomson Financial, Wall Street expects AACC to earn 67 cents per share this year and 92 cents a share in 2008. This implies an expected growth of about 37%.
Very simply that kind of growth impresses me. If it is achieved, the stock will trade higher. However, until I see a quarter or two of consistent -and profitable - earnings, I'd be reluctant to get involved, particularly with the stock trading north of $11 a share.
Portfolio Recovery Associates (Nasdaq:PRAA)
Portfolio Recovery is involved in the purchase and collection of receivables. Unlike AACC it's coming off a decent third quarter.
In the period ended September 30, Portfolio Recovery posted a profit of 75 cents per share which is an improvement over the 70 cents per share it reported in the comparable period last year. On a net earnings basis, the improvement was about 4% better, to $11.7 million this year from $11.2 million last year.
There were other bright spots, as well. Cash collections were up 9% from $59.7 million last year to $65.2 million this year. And during the quarter the company repurchased roughly 900,000 shares of stock at an average price of $50.41. (For added insight, check out A Breakdown Of Stock Buybacks.)
Going forward Wall Street seems optimistic that the party will continue. At present analysts are expecting the company to earn $3.09 a share this year and $3.49 a share in 2008. That implies an expected growth rate of about 12.9%. Based on this, I think that the stock could be worth up to $50 a share. It currently sits at around of $40.
Bottom Line
Collections companies and companies that purchase stale receivables with the hopes of collecting on those debts provide a valuable service, particularly to corporations. Given the fragile state of the economy debt collectors may be in for a busy year.Both Asset Acceptance Capital Corporation and Portfolio Recovery Associates deserve a closer look.
