The firm will then typically try to call consumers and collect on the debts. This might involve negotiating a sharply reduced payment, cutting interest rates on the loan to zero, or forgiving a large portion of the debt. As long as the debt management firm can collect a few pennies more per dollar than it paid for the loans, the company profits.

In particular, Asta specializes in credit card debt, but also buys portfolios of auto loans and unpaid telephone bills.

Competitive Advantages:  There are several key barriers to entry for the debt management business in general. One is that debt managers must carefully price the debt they purchase -- paying just a few cents more per dollar for a particular loan portfolio can make the difference between a sizeable profit and a loss. ASFI has proven models for valuing the debt portfolios it buys, and it takes time to develop such sophisticated computer models.

Another advantage ASFI has over its competition is that it has the highest profit margins of any debt management firm in the business. The company's operating profit margin stands at more than 70%, against 38% for Portfolio Recovery Associates (Nasdaq: PRAA) and 24% for Asset Acceptance Corporation (Nasdaq: AACC).

One of the reasons for that higher margin is that ASFI outsources some traditional functions, such as making collection calls. This allows ASFI to focus its attention and internal resources on collecting from its most profitable accounts. That means, for example, identifying and initiating collection proceedings on just those consumers it can pursue in court for garnishment of wages or sales of assets.

Growth Drivers:  A general improvement in availability and pricing of non-performing loan portfolios (due to rising consumer defaults) is certainly boosting the growth rate of ASFI, along with the rest of the industry. However, my staff and I believe that ASFI has some compelling company-specific growth drivers as well.

Specifically, Asta has made some large, aggressive portfolio purchases this year. In the first six months of 2007, Asta purchased a total of about $10.2 billion worth of non-performing debt, nearly triple what it purchased in the first half of 2006. That portfolio includes one of the largest debt purchases for the industry -- a single $6.9 billion transaction in April. Asta only paid around $300 million for that $6.9 billion portfolio -- roughly 4.3 cents per dollar in face value.

These new portfolios appear to be highly attractive. Specifically, more than $1 billion of the $6.9 billion portfolio already has been litigated, and there are existing court judgments for repayments. That means ASFI has to do little or nothing more to collect on this debt. In addition, ASFI has identified another $350 million worth of debt that it has good cause to take to court -- debt of this nature tends to be more profitable as ASFI is able to collect a higher percentage via the court system. Overall, the company has been exceeding its targets for collection so far.

Asta has said that it has no need to go out and buy new debts in the near future -- it has scope to grow by simply continuing to sort through its highly attractive new portfolios of loans and identifying promising collection prospects. Thus, ASFI has the benefit of being able to sit back and only bid on the most profitable new portfolios that come to market.

Valuation and Outlook:  ASFI trades at about ten times 2008 earnings estimates and offers a long-term growth rate of +8%. This means the stock trades with a price-to-earnings-to-growth (PEG) ratio of about 1.25. We believe the +8% growth estimate may prove conservative, particularly given the company's recent better-than-expected performance in collecting on loans.

At any rate, a growth-oriented stock like ASFI can easily trade with a PEG ratio closer to 1.75. That equates to a price of more than $50 per share.

Paul Tracy
Editor
StreetAuthority Market Advisor

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About Paul Tracy

Paul Tracy co-founded StreetAuthority.com and became the firm's Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in 2006. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators.

Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S.

Paul graduated with a B.S. in Finance and Management from the McIntire School of Commerce at the University of Virginia.

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