Asta Funding Update
If you haven’t read part 1 of my analysis, I strongly recommend reading that one first here.
Asta Funding reported FY 2009 and Q4 earnings after the market closed yesterday and held its quarterly conference call this morning. I participated in the call – although during the Q&A I was cut short due to technical difficulties. Fortunately I was able to speak to the CFO Bob Michel on the phone for 10 minutes later in the day – I was impressed management is so accessible!
For full disclosure, I do NOT have a position in the stock, but I am watching it closely and think it warrants further research.
After much thinking, here are my take-aways from today:
1) My first reaction to the earnings release was surprise at the size of impairments taken in the quarter. A large part of my analysis was based on the assertion that the company had previously taken aggressive write-downs on its receivable portfolios, (in particular the portion accounted for using the interest method). I based this on an estimate I made about the cumulative impairment as a % of purchase price that they had taken since 12/31/07, and compared this to similar estimates for Asta’s competitors.
Nevertheless, in the 4th quarter, Asta took impairments of $137 million, including $74 million on the interest method portfolio – which represented 46.2% of the starting carrying balance on the interest method portfolio.
So I look a quite foolish now after putting together a “conservative” balance sheet just 10 days ago showing the interest portfolio receivables impaired 25% from their 6/30/09 levels, only to see that impairment nearly doubled in the next quarter.
Because it is such an important piece of the puzzle, I will show my estimate in detail (this is a compilation of information provided in the 10-K and 10-Q filings, all numbers are in thousands).
Beginning near the top right corner, the balance of $509,580 is the actual reported carrying balance at the beginning of 2008 Q2 (Dec 31, 2007). This is the first quarter where significant impairments were taken related to the recent economic turmoil. For each quarter, the rows show the changes in the carrying balance of receivables (remember this is only those receivables that are measured using the interest method – click here for a nice explanation of this accounting treatment).
In the actual filings, the company also includes a row for impairments. To analyze the cumulative impairments at Asta, I have removed this row to calculate what the carrying value would be WITHOUT impairments, and compared this to the actual carrying value. So as you move to the left after 2008 Q2, the top row is the balance WITHOUT impairments, not the actual carrying value.
I HAVE included $30.3 million of impairments that were taken on the “Palisades Portfolio” in Q2 2008 because in Q3 2008 this portfolio was transferred at its then-current carrying value (after the $30.3 impairment) to the cost recovery method of accounting. Since the portfolio was taken out of the interest method pool, the impairments need to go with it.
At the bottom of my table I also list the actual carrying value of the assets accounted for under the interest method. By comparing this with my estimate of the non-impaired carrying value, I was able to estimate that as of Q3 2009, these assets had been impaired ~33.6%.
The Q4 2009 data hasn’t been entirely released (the detail will be in the 10-K due out shortly), but as noted above, we do know that the interest method portfolio was impaired $74 million, and I am able to estimate the ending carrying balance of the portfolio within a few million at $69,837, representing a cumulative impairment since 12/31/07 of over 65% of the purchase price.
By way of comparison, Asta has some similar, publicly traded competitors. I looked at two of its peer companies (as noted by Asta in the 10-k) – Encore Capital Group and Asset Acceptance Capital Corp. Both companies provide more detail than Asta on impairments – explicitly showing cumulative impairments as a % of purchase price by vintage year. This is very helpful because while Asta has not purchased significant new portfolios since the credit crisis began and therefore substantially all of its assets are likely candidates for impairment (purchased at older, higher prices), both Encore and Asset Acceptance have continued to make purchases. Presumably these new purchases are at lower prices and not likely to be impaired – so it is helpful to be able to focus on just the assets that were purchased pre-crisis.
Encore Capital has taken cumulative impairments of 11.8% and 11.3% of purchase price on its portfolios purchased in 2005 and 2006, respectively. Asset Acceptance has taken cumulative impairments of 23.4% and 27.5% on its portfolios purchased 2005 and2006, respectively. This would suggest Asta has been more aggressive on impairments, as my estimates are 33.6% as of 6/30/09 and 65.4% as of 9/30/09.
At 65.4% impairment, it seems unlikely the assets are STILL being carried above fair value. However, I would have said the same thing about last quarter’s numbers. So in light of my previous post, I feel a bit like Kramer on the episode of Seinfeld where he takes a vow of silence…. “starting NOW.”
In Summary on Impairments
– I feel more confident than before that the stated book value is conservative
– I feel far less precise on my understanding of the fair value of the assets
– The company is generating an estimated $46 million tax refund in 2010 by taking these impairments. To the extent that management is choosing real cash benefits over reporting better earnings and hence adding value, I applaud them.
– I plan to spend more time digging to see if I can get a better comfort level on the appropriate fair value
2) My second take-away from today is how well the stock performed today relative to news that book value was reduced by 25%. The stock opened down approximately 15% and then traded up most of the day. Take a look at the stock chart, which explains it better than I can here.
I would like to think a large factor in this was the seemingly large margin of safety going into yesterday. Having that margin of safety leaves room for error of analysis (in my case on the impairments), bad luck (wish I could blame this), or deteriorating conditions.
I am sure the large tax refund also played a role.
3) The company once again reporting strong cash flows from interest method portfolios that are fully amortized ($9.6 million for the quarter). This income for 2007, 2008, and 2009 has been $23.9, 45.3, and 40,7 million, respectively. As I discussed in part 1, I think this is a key component of overlooked value at the company. I asked Bob Michel (CFO) about this today and in particular if the company could offer any visibility on the extent that this might continue. He wouldn’t provide any guidance, although he did say he expected it to decrease, although not to zero.
I wonder if this is simply a by-product of a company that is aggressive with impairments. Over the next few weeks I am going to see what I can dig up as far as comparing these cash flows to similar companies, and estimating future cash flows from these fully amortized portfolios going forward.
4) I am NOT making any specific buy/sell/hold calls yet, but will definitely be watching and analyzing in the weeks to come.
5) There is a lot more to talk about – the fact that Asta has completed paid off its credit facility, freeing up cash flow and removing some restrictive covenants on share repurchases and portfolio acquisitions (although no promises on either of these going forward). Also, Asta has estimated cash flows of $80-85 million from operating and investing activities for 2010 so I’d like to play out where that will go… More to come!
BTW I love feedback, questions, and criticisms if you have them.