Asta Funding Inc. (ASFI)

[fade2black]

I am reading the book 'Buffettology' by Mary Buffett - which talks about Warren Buffett's valuation methods. One of the methods that Buffett uses is to consider a stock as a bond with a variable coupon (the coupon is the periodic interest payment made to the bond holder).

The neat thing about this method is that it completely ignores P/E in the analysis.

I tried to apply this thinking to ASFI (Asta Funding Inc) -
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Current stock price = $35.7
Current EPS (Annual) = $3.22

Earnings Yield = 3.22/35.7 = 9%

We consider this as the Initial rate of return (IRR)
IRR = 9%

Annual EPS
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2006 3.22
2005 2.15
2004 1.57
2003 1.12
2002 1.19
2001 1.03

5 Year EPS growth rate (CAGR) = 25.6%
3 Year EPS growth rate (CAGR) = 42.19%
1 Year EPS growth rate (CAGR) = 49.77%

EPS growth rate is increasing YoY (very good) [except for 2003].

So ASFI stock can be considered a bond with an initial rate of return of 9% and a variable coupon rate. This variable coupon is having a compounded growth rate of approx 30% per year (take a rough average of the multi year EPS growth rates).

Points
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1. By buying a treasury bond, I get 4% coupon with no risk

2. By buying ASFI, there is some risk, so I should get a higher yield. 9% seems pretty good compensation to me. Plus, the coupon is a variable coupon that grows at 30% a year. So, if I get 9% this year, next year will be 9 + (.3 * 9) = 12.7% and so on.

3. I have done similar analysis for other companies also. As per the book, Buffett did a similar analysis of KO before buying $500 million worth of stock. 9% IRR is very respectable (however, the IRR is essentially E/P - inverse of P/E, so maybe I am letting in PE by the backdoor :-)


DCF
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Lets do a Discounted Cash Flow calculation as well to see if we can pin down an intrinsic value for ASFI -

DCF Calculator -
Discounted Cash Flow Calculator for Stock Valuation

We are going to be very conservative and plug in very modest growth rates in the DCF calculation.

Plug in the following values -

EPS (TTM) = 3.22
Earnings growth rate = 3% (this is just inflation rate)
for next 5 years
Annual growth rate thereafter = 5% (again just inflation rate)
Discount rate = 15%

DCF = $27.64

So, if this company did not grow at all (grew just at inflation rate), then the intrinsic value is $27.

DCF values can be very jumpy. If I plugged in 5% (intial growth), 5% (subsequent growth), 13% discount rate, the DCF would be $48.

Now, what should be take as the discount rate? Treasury bonds give 4%, CDs give 5% - so you can get 5% without risk. This is the lower bound. Normally, I give values ranging from 12%-20% depending upon the risk.

Other points
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A. This company is a competitor to PRAA in the debt collection business. They typically buy $1 debt for 3 cents from credit card issuers, telcos etc. and try to collect from deadbeats.

B. Company is very lean, they farm out the debt collection to third parties that they have a relationship with.

C. Run by a father and son team who have many years of experience in this business.

D. It has 500 million market cap, trading volume is 197000, so volume per day is around 2%.

E. Debt collection is expected to do well in a recessionary env (I think we are in a recession already - or will be soon).

F. Determining the meaning is the hardest part. I do not want to buy a business that I do not understand well. I am still researching this, but the numbers pencil out.

G. I ran the analysis on Alex's stock analyzer - stock2own.com: Stock Analyzer

Looks good.

H. Not recommending this stock by any means. It it on my list and I am studying it.

Would welcome comments - both positive and negative. If you have any dirt on this stock, please post and I will study that also.

[fade2black]

" ... F. Determining the meaning is the hardest part."

Let me add here that determining moat is even harder. What stops a competitor from jumping into this business and bidding higher than ASFI to buy bad debt? Nothing.

It requires a certain amount of knowledge and discipline to not overbid for this debt. From my research so far, ASFI has this - they ask for sample customer data from their prospects, run it through some proprietary models to see how collectible the debt is and then submit a bid .. perhaps this gives them a narrow moat.

[bovverd]

People value business's in different ways. A classic example of this is the fact that the portfolios and historical holdings of all the superinvestors are entirely different from eachother. Buffett's holdings have been different to Christopher Brownes and Brownes have been different to Schloss and Schloss's totally different to Soros.This is what makes Value investing such a great game. There is no single right way or wrong way with regards to the value approach.

Now some of you may or may not know (Or may not care) that I have chosen the valuation of Assets to be my game. This is my personal choice as I am most at ease with establishing a general floor in the share price of a company relative to its assets so the potential downside is very limited. This is my approach and I dont expect or care if people agree.

I did initially began with Rule 1 but as I read more and more I became uncomfortable with investing in overpriced historical growth business's when growth in general is at risk due to the economic downturn we are now experiencing. Again this is my personal view which I dont expect people to agree with.

The reason I am writing this today is that one of my old Rule 1 style business's appears to have krept into my world of book value and Assets so COULD be considered cheap fror me and very very cheap for the Rule 1 guys.

ASFI closed yesterday at $18.16 which is very close to their 52 week low.
It is now very close to its net current asset value and is selling for only 16 cents above book value. They do not appear to have been affected by sub prime either and have experienced excellent historical growth rates which is the very reason some of you Rule 1 guys may have been watching it. I believe its a father and son managment team too.

So this could be one candidate that is worthy of further due dilligence. Has it been oversold because of credit crunch and sub prime fears? Are those fears specific to this business at all? Should this company be worth more than book value? With assets supporting the price will it become much cheaper? Is the downside limited and the upside considerable if one is prepared to wait long enough ?

An interesting situation indeed.

[Gunnski]

ASFI?

Wow good luck with that one! Loads of serious trouble, overhead resistance, and looks to run sideways for awhile on weak declining volume.

Just becaase it looks cheap, does not mean you should buy it & represents value.

[bovverd]

Originally Posted by Gunnski

ASFI?

Wow good luck with that one! Loads of serious trouble, overhead resistance, and looks to run sideways for awhile on weak declining volume.

Just because it looks cheap, does not mean you should buy it & represents value.

This is my point Gunnski 'Value' is exactly what this one does represent.

Maybe you can elaborate on serious trouble? There isnt anything in their recent earnings release to suggest any trouble??

Currently to buy the whole thing would cost you $243 Million Dollars and just the net current assets alone are worth 230.65 million dollars so you are getting the rest of the business which has been growing its equity by well over 25% for the last ten years for er..$12.37 million dollars...

Who ever said 'anything is worth buying at the right price' ?

We shall have to wait and see!

[Gunnski]

Agreed & best of luck! We'll watch this one together. Today its only down 3.36%, current price $17.55. That will be a fair bench mark to track.

[bovverd]

Originally Posted by Gunnski

Agreed & best of luck! We'll watch this one together. Today its only down 3.36%, current price $17.55. That will be a fair bench mark to track.

Ok but bear in mind its liquidating value is $16.56 so in theory I would only be a dollar short of getting my money back!

[tombrown1]

Originally Posted by bovverd

This is my point Gunnski 'Value' is exactly what this one does represent.

Maybe you can elaborate on serious trouble? There isnt anything in their recent earnings release to suggest any trouble??

Currently to buy the whole thing would cost you $243 Million Dollars and just the net current assets alone are worth 230.65 million dollars so you are getting the rest of the business which has been growing its equity by well over 25% for the last ten years for er..$12.37 million dollars...

Who ever said 'anything is worth buying at the right price' ?

We shall have to wait and see!

Sorry, but a 62% loss in less than a year means that something is up - this is clearly not Mr. Market going crazy. He rarely goes crazy to the tune of 62%.

There's only one analyst willing to project a 5-year eps growth rate - and he/she says it will be 8% - a far cry from 25%.

That said, the historical numbers do look pretty good. If you know FOR CERTAIN that the credit crunch is not affecting them then you might be able to make a great value play for them. But you absolutely have to figure out what's going on with the 62% loss first.

Good luck and keep us posted.

[Gunnski]

Exactly. I'll just run over to Nevada and put all my money on RED on the Roulette Table because BLACK has come up 12 times in a row straight.

Since you asked about "serious". Here is why I state that situation. This stock is in a steady "freefall" down trend. In an extreme down trending & volatile market. Very difficult to get any legs on this slippery slope. It is following the short term MA straight down. It is nowhere near a long term MA. It will not get a sniff of one for quite awhile.

If the volume starts to perk up, it will bounce up a couple of times, but appears that it is going to consolidate for who knows how long? It has serious overhead resistance at $20.00, $23.00, $27.50 and $32.50 just looking at the chart. That is a ton of serious resistance (a lot of doors to kick in, to break through that resistance). Each kick takes at least 2-5 times to break through. That is alot of work, for very little upside.

I really think this is a broken stock. "Guilty until proven innocent". I hope I am wrong & it takes you right to the moon!

[bovverd]

Originally Posted by Gunnski

Exactly. I'll just run over to Nevada and put all my money on RED on the Roulette Table because BLACK has come up 12 times in a row straight.

Since you asked about "serious". Here is why I state that situation. This stock is in a steady "freefall" down trend. In an extreme down trending & volatile market. Very difficult to get any legs on this slippery slope. It is following the short term MA straight down. It is nowhere near a long term MA. It will not get a sniff of one for quite awhile.

If the volume starts to perk up, it will bounce up a couple of times, but appears that it is going to consolidate for who knows how long? It has serious overhead resistance at $20.00, $23.00, $27.50 and $32.50 just looking at the chart. That is a ton of serious resistance (a lot of doors to kick in, to break through that resistance). Each kick takes at least 2-5 times to break through. That is alot of work, for very little upside.

I really think this is a broken stock. "Guilty until proven innocent". I hope I am wrong & it takes you right to the moon!

Gunnski you choose use a casino roulette analogy suggesting a buy with this one is speculative and then proceed in talking technical charts, moving averages, resistance and low volumes!?. Ignoring fundamentals and waiting for little lines to cross over other little lines to indicate a buy or a sell of a business would suggest a much better use of your roulette idea.

How many times do you get the three greens on the tech tools only for it to turn straight back down and head the other way on the very next trading session? Thats just another black instead of the red you were expecting.

Your technical charts are just telling you what has already happened and as we can see, its being oversold. Freefall downtrend? Yes thats exactly what happens when the market becomes pessimistic and oversells a company or sector. Finance has been oversold. We knew that already. What are your charts saying with regards to where this share price will be in a years time? Your suggestion this company is broken because it was selling for $42 and is now selling for $17 is fundamentally flawed.

I believe the company has been oversold because their business is debt and the market are expecting them to be effected by the same problems the banks are experiencing. They have just released their latest quarterly and it is in line with previous releases and there are no apparent sub prime issues. They dont buy home loans they purchase credit card and personal loan debt.

There are no publications from any market analysts with suggestions or reasons for the decline so again it appears like a pessimistic market sell off for no reasons specific to the company itself.

Most financial stocks are being sold in the current market climate for general market fears rather than specifics. Here in the UK Barclays has lost 20% in the last three months alone and their sub prime exposure has been very limited relative to competitors.

Here are some quotes to illustrate my angle:

"I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer." -- Warren Buffett ...

"The most common cause of low prices is pessimism-some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." - 1990 Chairman's Letter to Shareholders - Buffett

It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone - after deducting all prior claims, and counting as zero the fixed and other assets - the results should be quite satisfactory." -Ben Graham

ASFI are currently selling for slightly more than the value of the tangible net current assets alone. This provides a fundamental floor in the share price and should prevent it from falling much further.

The assets are currently worth £16.56 per share so currently the rest of the business is worth only $0.83 per share. So your getting $10.08 revenue per share and $3.67 of earnings per share for $0.83!!!! Does that not sound like good value ?

It has a book value of $18 a share.

The growth rates earnings and profits of this business suggest its worth considerably more than book or assets. I am not suggesting it will fly off into orbit any time soon. I am suggesting this thing is currently very conservatively priced relative to the assets the business has on its books AND how well the business has been performing. Even if you were to reduce the perfomance of the business by 50% $17.39 would still be a conservative price.

Im prepared to wait but I certainly will not let low volumes resistances and moving averages prevent me from buying a well run company at this price.

Plus....Maybe buying non home loan debt from banks in the current market climate will soon become more favourable to ASFI.