|Profiting from the bankruptcy bill
A new law provides an opportunity for debt collectors.
After eight years of failed efforts, banks and credit card companies can declare victory in the battle to toughen the bankruptcy code. In mid-April, the long-awaited and heavily-criticized bankruptcy reform bill cleared the House, and the President is certain to sign it into law. Issuers of consumer credit clearly stand to win big. But there's another group that will gain from a law making it more difficult for consumers to escape their obligations: businesses that buy and collect delinquent debt.
Debt collection may be an icky business, but it's a lucrative one -- and it's getting bigger daily. "There's going to be a growing supply of charged-off debt," says Dan Fannon, an analyst with Jefferies. "When you look at the five- to ten-year supply, it's a pretty rosy outlook." Last year, total revolving credit reached $825 billion. And credit card companies wrote off $54 billion in bad debt, according to The Nilson Report. That's good news for companies like Portfolio Recovery (PRAA, $34) and Asset Acceptance (AACC, $19),,which pay pennies on the dollar to creditors for the right to badger people about long-past-due bills. The reform bill means "companies will have more raw material to work with," says analyst Steve DeLaney of Ryan Beck. One drawback: Debt collecting is an easy business to break into. Lately, new competitors have driven up the price of buying debt, driving down the group's stock prices.
The bargain of the bunch is probably Asta Funding (ASFI, $20), which has a P/E of just 12. In the past two years Asta has spent $254 million to purchase $7.3 billion of debt obligations, more than any of its peers. It also puts an emphasis on purchasing "fresh paper," or charged-off debt that companies haven't tried to collect. The strategy is more expensive but yields a better return. And the firm keeps overhead low by outsourcing most of its recovery operations to collection specialists. All of which could make Asta a stock worth putting your money into. Just don't borrow from your credit cards to do it.