CompuCredit CCRT
August 27, 2007 - 3:47am EST by
timothy756
2007 2008
Price: 21.86 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,080 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Compucredit (CCRT) is a wonderful business that is trading at well under 1/3 of it’s 2009 intrinsic value. Holding the stock for 2-3 years is likely to yield a 30-70% annualized return with minimal downside.
 
Compucredit is a subprime lender that provides credit and related financial services and products to the underserved consumer credit market. While subprime is a four lettered word nowadays, there is real value here and minimal risk. This baby got thrown out with the bath water.
 
The company is expected to see substantial increases in earnings in the 2nd half of 2007 which is expected to continue into 2008 and beyond. Average consensus estimates for 2008 earnings are $4.47. I believe this is understated. Also, earnings are expected to continue to grow at atleast a double digit rate in 2009 and beyond. A well-managed $5-6 earner ought not to trade at twenty something. And those earnings are being delivered with an under-leveraged balance sheet. The current subprime dislocations are likely presenting excellent opportunities to CCRT’s savvy management – helping pave the way for very robust earnings growth in the years ahead.
 
Let’s dig into CCRT’s various business units:
 
1.   Credit Cards
 
Compucredit is the largest marketer and servicer of credit cards solely dedicated to the subprime space in the US. The credit card business can be broadly divided into two parts – Origination and Portfolio Purchases. Compucredit markets credit cards to credit-impaired customers. They have two main types of credit card offerings:
 
·         Fee-based Credit Cards
·         Standard Credit Cards
 
Here are the typical nuances of the fee-based cards:
 
FICO Score:                     <600 (credit impaired)
Annual Fee:                      $150
Activation Fee:                 $29
Monthly Maint. Fee:          $6.50
Average Credit Limit:        $300
Average APR:                   20%
Net Charge Offs:               20%
And here are the typical nuances of the standard cards:
 
FICO Score:                     600 – 700 (sloppy players)
Annual Fee:                      $0-85
Activation Fee:                 $0
Monthly Maint. Fee:          $0
Average Credit Limit:        $2000
Average APR:                   19-29%
Net Charge Offs:               8%
 
As you can see, CCRT makes money on both products. Their core competency is that they have a very good handle on the defaults, chargeoffs etc. and have products that deliver real-value to these households while making business sense to the company. The universe of folks CCRT focuses on is 75 Million people in the US and about 20 Million people in the UK. That’s 25% of the US population that very much has pressing credit needs. The products offered lend themselves to recurring revenues and customer loyalty. By appropriately pricing the risk, CCRT is able to profitably manage itself through the credit card business.
 
Portfolio Purchases
 
Savvy insurers like Berkshire let their premium volumes ebb and flow based on the pricing offered. Since 1998, CCRT has purchased more than $6 Billion in credit card receivables portfolios through approximately ten transactions. CCRT has not had even one of these deals turn out to be unfavorable to the company. They know this space cold and are typically buying portfolios from companies whose core business is not subprime credit card lending. This business (of buying portfolios) is not at all smooth. It comes and goes based on market pricing. CCRT management are extremely savvy allocators of capital. They are only interested in growing their credit card business if it makes economic sense. In 2006 they did no deals as pricing was unfavorable. In 2006, they focused on growing organically.
 
Let’s look at their most recent deal to buy a $970 Million portfolio of credit card receivables from Barclays in the UK in April ’07. They purchased this portfolio for $770 Million – at about a 21% discount to its book value. This portfolio comprises about 500,000 subprime UK customers with interest rates in the 30-32% range – similar to CCRT’s existing business. In addition, the company was able to establish European operations (for free) and is sharing best practices across their US and UK businesses. They expect to use this platform to grow organically in the UK with originations etc.
 
CCRT immediately securitized this portfolio with Bank of America. Advance rate was likely 80-90% (tying up $75-150 Million of CCRT capital). CCRT has plenty of liquidity to do more such deals or invest in originations marketing, its other businesses or share buybacks. Prior to the Barclays deal they had about $700 Million of excess capital/liquidity.
 
Since the acquisition, on the Q2 call, the company mentioned that, while it was still early, it appears that the portfolio they acquired is performing meaningfully better than their expectations when they bought.
 
2.   Jefferson Capital
 
This business buys previously charged-off receivables and Chapter 13 bankruptcy collections. They have an innovative balance transfer program which enables someone with severely impaired credit to get a usable credit card without having to put up a security deposit. Jefferson represents about 5-10% of the CCRT earning’s pie today. The company is innovative and had demonstrated a repeated ability to enter and scale new lines of businesses. In the future Jefferson is likely to keep growing.
 
3.   Retail Micro-Lending (Pay Day Loans)
 
They entered this business through acquisition in 2004. They operate about 500 stores in 17 states. The average loan is $300 for 2 weeks with a $15 fee for every $100 borrowed (ouch!). While this appears high, it is lower than overdrafts or other late fee charges etc. They have 4 stores in the UK and plan to scale this business in the UK and certain US states with enabling legislation. This segment also makes up less than 5% of the pie.
 
4.   Auto Lending
 
This is a relatively new business which they acquired from Wells Fargo in 2005. They offer these loans through car dealers (buy here; pay here) and have recently acquired ACC (another auto lender). Management had expressed disappointment about the lack of growth in this business and hope to change that in the coming years (less than 3% of the earnings pie).
 
If you look at Compucredit over the years, one notices that they enter new businesses periodically in a small way, learn the business and then scale up. The common theme in all their businesses is the focus on the subprime borrower.
 
Subprime Mortgages
 
The company does not originate subprime mortgages. They were introduced to a John Devaney in 2002 who runs a hedge fund (United Capital Markets) that had significant exposure to Collateralized Debt Obligations (CDOs) and CMOs. Devaney’s fund owned about 10% of CCRT’s stock (5.4 Million shares) and CCRT had invested in his fund. Devaney took heavy losses in Q2 and due to margin calls needed to quickly unload positions. The company bought back some of this stock at about $28/share at the time. In addition CCRT reported a $25 Million loss related to UCM and carried the rest of the investment at $45 Million.
 
This loss caused some of the recent drop in CCRT’s stock price. News came out at the same time the rest of the subprime turmoil was underway. To put this in context, the company had less than 5% of its book value invested in UCM and the loss is roughly what the company generates in earnings in 4-6 weeks.
 
My take on this saga: These guys do deals and try to allocate capital intelligently. They’ve acquired 10 credit card portfolios, various charged off portfolios, auto lending businesses, pay day businesses etc. All of the deals are in the very toxic end of subprime lending. All except this one has worked. The ratio of great deals to lossy deals is highly favorable to CCRT stockholders.
 
Fallout from Subprime Mortgage mess on CCRT
 
A natural question with CCRT is how does the subprime mortgage mess effect CCRT and its default rates. Here is David Hanna’s (CEO) commentary from the 2006 CCRT annual report (published in April ’07):
 
We have also been asked whether problems in the mortgage market might affect our customer base despite what we have done to ensure proper underwriting of our customers. We do believe that if the problems in the mortgage market cause a recession (which we think is unlikely) we will make less money that we would make in a robust economy. We have been through a recession at Compucredit, and we found that those lenders who made good decisions and had discipline were able to weather the negative economic storm and emerge as even stronger companies.
 
Finally, there is the question regarding the effect on CompuCredit should our customers have a problem with their individual mortgages. In particular, what about the customer who took out a mortgage loan at a low interest rate that has now reset at a higher interest rate, thus causing the customer to have higher payments? We have performed fairly extensive analysis regarding this issue, and do not believe it will represent a meaningful problem for CompuCredit. Our data tells us that about 36% of our customers are homeowners. If we assume that 25% of these customers, during the last two years, obtained a mortgage that resets after two years, we could theoretically have 9% of our customers facing a rising mortgage payment. Based on public data, it appears as though 15% to 20% of people with these types of mortgages might have a problem with the repayment of their loans. This would indicate that 1.35% to 1.8% of our customers might have an issue with their mortgage payment in 2007. We think that this is a number that we can manage. Fortunately, to date, we have not seen anything in our data that would indicate any greater issue, but we intend to stay on top of the matter.
 
The Nature of Management & Stock Ownership
 
David Hanna quotes Buffett in his shareholder letters. His annual salary is $50,000 – unchanged for a few years. He takes no bonus and has not awarded himself any stock options as far back as I checked. His only other comp from the company is about $1 Million a year of charter jets by the Hanna family paid by the company.
 
The Hanna Family owns 28.35 Million shares of stock. All officers and directors as a group own 31.5 Million shares. There were 49.2 Million shares outstanding as of June 30, 2007. It is highly likely the shares outstanding has gone down since then as the company buys back stock at its current ultra-cheap price.
 
Here’s the stock ownership summary:
 
Hanna and Insiders:                             31.5 Million Shares
Second Curve (Tom Brown):        4.7 Million shares
Corsair Capital:                          1.5 Million shares
Pabrai Investment Funds:            1.6 Million Shares
 
Total:                                        $39.3 Million shares
 
Some 80% of the float is “tied up.” The company has been an aggressive purchaser of its stock. In this environment, they have lots of opportunities outside of a buyback, but a buyback is extremely attractive right now. Buying back the remaining 10 Million shares would cost under $250 Million – they can easily do this.
 
The company’s board authorized a 10 Million share repurchase in May 2006. In Q107, the company bought 2.9 Million shares from Delaney in a private transaction. They have authorization to buy another 7.1 Million shares that does not expire till mid-2008.
 
Here is a sentence from their Q2 10-Q:
 
We will continue to evaluate our stock price relative to other investment opportunities and, to the extent we believe that the repurchase of our stock represents an appropriate return of capital, we will repurchase additional shares of our stock.
 
Valuation:
 
Compucredit’s GAAP earnings are mostly irrelevant to getting to real earnings and cash flows. As an example, when they bought the Barclays portfolio for $770 Million for $970 Million, GAAP requires them to book a gain. Then when the losses from delinquent cardholders come through, it gets recorded as a loss – even though the company fully expects those losses and subtracted them from the purchase price in the first place. Compound the Barclays transaction with all the other portfolios they’ve bought, acquisitions etc. and GAAP become meaningless.
 
The company uses Managed Earnings as a metric. They guided that Q307 earnings would be between $1.35 to $1.50 per share and Q4 would be $1.65 to $1.80. They further added the run-rate for 2008 would be “between Q3 and Q4 numbers.”
 
At the low-end Q3 is $1.35 and Q4 is $1.65. Mid-point is $1.50/quarter. At the high-end, average is $1.65. So 2008 earnings are likely between $6 and $6.60 per share. Beyond that earnings should rise at a decent clip as they put their $700 Million of liquidity to work. The annual cash flow generation is north of $300 Million from 2008 onwards – letting them invest aggressively in the right opportunities.
 
If they bought back 5 Million add’l shares, then the $6 - $6.60 per share earnings jump to $6.67 - $7.34/share. It gets even more ridiculous if they buy back more shares.
 
2009 earnings are likely well over $7/share. What should a $6-7 earner trade for? A 10x multiple gets you to triple the current stock price and a 15x multiple gets CCRT to over $100/share.
 
The Tiger Cubbie – Tom Brown
 
2007 has not been a good year thus far for Tom Brown’s Second Curve Capital. With 100% of assets in the financial sector and lots of exposure to subprime, Second Curve is deeply in the red in terms of performance YTD. But they have more than delivered great returns to their investors since inception. Tom Brown is a Tiger cub. He used to be with Julian Robertson and he and his team are extremely good at evaluating bank and financial services businesses and finding value. Brown’s picks can be quite volatile, but they’ve mostly done very well over time. Compucredit was presented by Tom at the Nov. ’06 Value Investing Congress in NYC. Here is that link:
 
http://www.bankstocks.com/images/valueinvestorBKS.ppt
 
And here’s an article by Tom on Compucredit
 
http://www.bankstocks.com/article.asp?id=9881206
 
With some $150 Million invested in Compucredit, it is one of Tom’s largest positions. I estimate he bought at prices over 50% higher than present. Tom has about $700 Million under management - typically invested in under 15 stocks.
 
Risks:
 
The risks with CCRT are well disclosed in their 10-K. They’ve had run-ins with regulators and been fined in the past (insignificant amounts). Pay-day lending will always have its detractors. The company believes that they have to charge fees and interest rate commensurate with the underlying risks. They have taken some actions to appease regulators. But any significant legal changes would affect CCRT. This sector of credit comprises 25% of the population. It is underserved and very few institutions are able to address the market opportunity profitably and scale. To the extent regulators and lawmakers are cognizant of the realities, risk of major law changes is unlikely.

Catalyst

As the earnings get reported for the next few quarters and the market begins to distinguish Compucredit from other subprime mortgage players, the stock should rally. The 10 Million+ shares sold short coupled with an aggressive buy back might just provide the propellant to lift the stock considerably higher.
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    Description

    Compucredit (CCRT) is a wonderful business that is trading at well under 1/3 of it’s 2009 intrinsic value. Holding the stock for 2-3 years is likely to yield a 30-70% annualized return with minimal downside.
     
    Compucredit is a subprime lender that provides credit and related financial services and products to the underserved consumer credit market. While subprime is a four lettered word nowadays, there is real value here and minimal risk. This baby got thrown out with the bath water.
     
    The company is expected to see substantial increases in earnings in the 2nd half of 2007 which is expected to continue into 2008 and beyond. Average consensus estimates for 2008 earnings are $4.47. I believe this is understated. Also, earnings are expected to continue to grow at atleast a double digit rate in 2009 and beyond. A well-managed $5-6 earner ought not to trade at twenty something. And those earnings are being delivered with an under-leveraged balance sheet. The current subprime dislocations are likely presenting excellent opportunities to CCRT’s savvy management – helping pave the way for very robust earnings growth in the years ahead.
     
    Let’s dig into CCRT’s various business units:
     
    1.   Credit Cards
     
    Compucredit is the largest marketer and servicer of credit cards solely dedicated to the subprime space in the US. The credit card business can be broadly divided into two parts – Origination and Portfolio Purchases. Compucredit markets credit cards to credit-impaired customers. They have two main types of credit card offerings:
     
    ·         Fee-based Credit Cards
    ·         Standard Credit Cards
     
    Here are the typical nuances of the fee-based cards:
     
    FICO Score:                     <600 (credit impaired)
    Annual Fee:                      $150
    Activation Fee:                 $29
    Monthly Maint. Fee:          $6.50
    Average Credit Limit:        $300
    Average APR:                   20%
    Net Charge Offs:               20%
    And here are the typical nuances of the standard cards:
     
    FICO Score:                     600 – 700 (sloppy players)
    Annual Fee:                      $0-85
    Activation Fee:                 $0
    Monthly Maint. Fee:          $0
    Average Credit Limit:        $2000
    Average APR:                   19-29%
    Net Charge Offs:               8%
     
    As you can see, CCRT makes money on both products. Their core competency is that they have a very good handle on the defaults, chargeoffs etc. and have products that deliver real-value to these households while making business sense to the company. The universe of folks CCRT focuses on is 75 Million people in the US and about 20 Million people in the UK. That’s 25% of the US population that very much has pressing credit needs. The products offered lend themselves to recurring revenues and customer loyalty. By appropriately pricing the risk, CCRT is able to profitably manage itself through the credit card business.
     
    Portfolio Purchases
     
    Savvy insurers like Berkshire let their premium volumes ebb and flow based on the pricing offered. Since 1998, CCRT has purchased more than $6 Billion in credit card receivables portfolios through approximately ten transactions. CCRT has not had even one of these deals turn out to be unfavorable to the company. They know this space cold and are typically buying portfolios from companies whose core business is not subprime credit card lending. This business (of buying portfolios) is not at all smooth. It comes and goes based on market pricing. CCRT management are extremely savvy allocators of capital. They are only interested in growing their credit card business if it makes economic sense. In 2006 they did no deals as pricing was unfavorable. In 2006, they focused on growing organically.
     
    Let’s look at their most recent deal to buy a $970 Million portfolio of credit card receivables from Barclays in the UK in April ’07. They purchased this portfolio for $770 Million – at about a 21% discount to its book value. This portfolio comprises about 500,000 subprime UK customers with interest rates in the 30-32% range – similar to CCRT’s existing business. In addition, the company was able to establish European operations (for free) and is sharing best practices across their US and UK businesses. They expect to use this platform to grow organically in the UK with originations etc.
     
    CCRT immediately securitized this portfolio with Bank of America. Advance rate was likely 80-90% (tying up $75-150 Million of CCRT capital). CCRT has plenty of liquidity to do more such deals or invest in originations marketing, its other businesses or share buybacks. Prior to the Barclays deal they had about $700 Million of excess capital/liquidity.
     
    Since the acquisition, on the Q2 call, the company mentioned that, while it was still early, it appears that the portfolio they acquired is performing meaningfully better than their expectations when they bought.
     
    2.   Jefferson Capital
     
    This business buys previously charged-off receivables and Chapter 13 bankruptcy collections. They have an innovative balance transfer program which enables someone with severely impaired credit to get a usable credit card without having to put up a security deposit. Jefferson represents about 5-10% of the CCRT earning’s pie today. The company is innovative and had demonstrated a repeated ability to enter and scale new lines of businesses. In the future Jefferson is likely to keep growing.
     
    3.   Retail Micro-Lending (Pay Day Loans)
     
    They entered this business through acquisition in 2004. They operate about 500 stores in 17 states. The average loan is $300 for 2 weeks with a $15 fee for every $100 borrowed (ouch!). While this appears high, it is lower than overdrafts or other late fee charges etc. They have 4 stores in the UK and plan to scale this business in the UK and certain US states with enabling legislation. This segment also makes up less than 5% of the pie.
     
    4.   Auto Lending
     
    This is a relatively new business which they acquired from Wells Fargo in 2005. They offer these loans through car dealers (buy here; pay here) and have recently acquired ACC (another auto lender). Management had expressed disappointment about the lack of growth in this business and hope to change that in the coming years (less than 3% of the earnings pie).
     
    If you look at Compucredit over the years, one notices that they enter new businesses periodically in a small way, learn the business and then scale up. The common theme in all their businesses is the focus on the subprime borrower.
     
    Subprime Mortgages
     
    The company does not originate subprime mortgages. They were introduced to a John Devaney in 2002 who runs a hedge fund (United Capital Markets) that had significant exposure to Collateralized Debt Obligations (CDOs) and CMOs. Devaney’s fund owned about 10% of CCRT’s stock (5.4 Million shares) and CCRT had invested in his fund. Devaney took heavy losses in Q2 and due to margin calls needed to quickly unload positions. The company bought back some of this stock at about $28/share at the time. In addition CCRT reported a $25 Million loss related to UCM and carried the rest of the investment at $45 Million.
     
    This loss caused some of the recent drop in CCRT’s stock price. News came out at the same time the rest of the subprime turmoil was underway. To put this in context, the company had less than 5% of its book value invested in UCM and the loss is roughly what the company generates in earnings in 4-6 weeks.
     
    My take on this saga: These guys do deals and try to allocate capital intelligently. They’ve acquired 10 credit card portfolios, various charged off portfolios, auto lending businesses, pay day businesses etc. All of the deals are in the very toxic end of subprime lending. All except this one has worked. The ratio of great deals to lossy deals is highly favorable to CCRT stockholders.
     
    Fallout from Subprime Mortgage mess on CCRT
     
    A natural question with CCRT is how does the subprime mortgage mess effect CCRT and its default rates. Here is David Hanna’s (CEO) commentary from the 2006 CCRT annual report (published in April ’07):
     
    We have also been asked whether problems in the mortgage market might affect our customer base despite what we have done to ensure proper underwriting of our customers. We do believe that if the problems in the mortgage market cause a recession (which we think is unlikely) we will make less money that we would make in a robust economy. We have been through a recession at Compucredit, and we found that those lenders who made good decisions and had discipline were able to weather the negative economic storm and emerge as even stronger companies.
     
    Finally, there is the question regarding the effect on CompuCredit should our customers have a problem with their individual mortgages. In particular, what about the customer who took out a mortgage loan at a low interest rate that has now reset at a higher interest rate, thus causing the customer to have higher payments? We have performed fairly extensive analysis regarding this issue, and do not believe it will represent a meaningful problem for CompuCredit. Our data tells us that about 36% of our customers are homeowners. If we assume that 25% of these customers, during the last two years, obtained a mortgage that resets after two years, we could theoretically have 9% of our customers facing a rising mortgage payment. Based on public data, it appears as though 15% to 20% of people with these types of mortgages might have a problem with the repayment of their loans. This would indicate that 1.35% to 1.8% of our customers might have an issue with their mortgage payment in 2007. We think that this is a number that we can manage. Fortunately, to date, we have not seen anything in our data that would indicate any greater issue, but we intend to stay on top of the matter.
     
    The Nature of Management & Stock Ownership
     
    David Hanna quotes Buffett in his shareholder letters. His annual salary is $50,000 – unchanged for a few years. He takes no bonus and has not awarded himself any stock options as far back as I checked. His only other comp from the company is about $1 Million a year of charter jets by the Hanna family paid by the company.
     
    The Hanna Family owns 28.35 Million shares of stock. All officers and directors as a group own 31.5 Million shares. There were 49.2 Million shares outstanding as of June 30, 2007. It is highly likely the shares outstanding has gone down since then as the company buys back stock at its current ultra-cheap price.
     
    Here’s the stock ownership summary:
     
    Hanna and Insiders:                             31.5 Million Shares
    Second Curve (Tom Brown):        4.7 Million shares
    Corsair Capital:                          1.5 Million shares
    Pabrai Investment Funds:            1.6 Million Shares
     
    Total:                                        $39.3 Million shares
     
    Some 80% of the float is “tied up.” The company has been an aggressive purchaser of its stock. In this environment, they have lots of opportunities outside of a buyback, but a buyback is extremely attractive right now. Buying back the remaining 10 Million shares would cost under $250 Million – they can easily do this.
     
    The company’s board authorized a 10 Million share repurchase in May 2006. In Q107, the company bought 2.9 Million shares from Delaney in a private transaction. They have authorization to buy another 7.1 Million shares that does not expire till mid-2008.
     
    Here is a sentence from their Q2 10-Q:
     
    We will continue to evaluate our stock price relative to other investment opportunities and, to the extent we believe that the repurchase of our stock represents an appropriate return of capital, we will repurchase additional shares of our stock.
     
    Valuation:
     
    Compucredit’s GAAP earnings are mostly irrelevant to getting to real earnings and cash flows. As an example, when they bought the Barclays portfolio for $770 Million for $970 Million, GAAP requires them to book a gain. Then when the losses from delinquent cardholders come through, it gets recorded as a loss – even though the company fully expects those losses and subtracted them from the purchase price in the first place. Compound the Barclays transaction with all the other portfolios they’ve bought, acquisitions etc. and GAAP become meaningless.
     
    The company uses Managed Earnings as a metric. They guided that Q307 earnings would be between $1.35 to $1.50 per share and Q4 would be $1.65 to $1.80. They further added the run-rate for 2008 would be “between Q3 and Q4 numbers.”
     
    At the low-end Q3 is $1.35 and Q4 is $1.65. Mid-point is $1.50/quarter. At the high-end, average is $1.65. So 2008 earnings are likely between $6 and $6.60 per share. Beyond that earnings should rise at a decent clip as they put their $700 Million of liquidity to work. The annual cash flow generation is north of $300 Million from 2008 onwards – letting them invest aggressively in the right opportunities.
     
    If they bought back 5 Million add’l shares, then the $6 - $6.60 per share earnings jump to $6.67 - $7.34/share. It gets even more ridiculous if they buy back more shares.
     
    2009 earnings are likely well over $7/share. What should a $6-7 earner trade for? A 10x multiple gets you to triple the current stock price and a 15x multiple gets CCRT to over $100/share.
     
    The Tiger Cubbie – Tom Brown
     
    2007 has not been a good year thus far for Tom Brown’s Second Curve Capital. With 100% of assets in the financial sector and lots of exposure to subprime, Second Curve is deeply in the red in terms of performance YTD. But they have more than delivered great returns to their investors since inception. Tom Brown is a Tiger cub. He used to be with Julian Robertson and he and his team are extremely good at evaluating bank and financial services businesses and finding value. Brown’s picks can be quite volatile, but they’ve mostly done very well over time. Compucredit was presented by Tom at the Nov. ’06 Value Investing Congress in NYC. Here is that link:
     
    http://www.bankstocks.com/images/valueinvestorBKS.ppt
     
    And here’s an article by Tom on Compucredit
     
    http://www.bankstocks.com/article.asp?id=9881206
     
    With some $150 Million invested in Compucredit, it is one of Tom’s largest positions. I estimate he bought at prices over 50% higher than present. Tom has about $700 Million under management - typically invested in under 15 stocks.
     
    Risks:
     
    The risks with CCRT are well disclosed in their 10-K. They’ve had run-ins with regulators and been fined in the past (insignificant amounts). Pay-day lending will always have its detractors. The company believes that they have to charge fees and interest rate commensurate with the underlying risks. They have taken some actions to appease regulators. But any significant legal changes would affect CCRT. This sector of credit comprises 25% of the population. It is underserved and very few institutions are able to address the market opportunity profitably and scale. To the extent regulators and lawmakers are cognizant of the realities, risk of major law changes is unlikely.

    Catalyst

    As the earnings get reported for the next few quarters and the market begins to distinguish Compucredit from other subprime mortgage players, the stock should rally. The 10 Million+ shares sold short coupled with an aggressive buy back might just provide the propellant to lift the stock considerably higher.

    Messages


    Subjectfee based cards
    Entry08/27/2007 10:33 AM
    Memberskyhawk887
    Interesting idea.

    As with the payday lenders, I think CCRT's fee-based card will be a lightning rod for consumer activists group--particularly if the Democrats sweep next year. Anyone who has to pay $257 in annual fees ($150 + 29 + $6.50*12) for a credit card with a $300 limit should probably not be given a credit card in the first place. Do you have any insights on consumer activism on CCRT?


    Doesn't Hanna's $50K salary and his family's use of the charter jet seem a bit inconsistent? (Why does CCRT even have a croporate jet?) That combined with questionable investment in UCM raises some red flags.

    Any real differences between your take on CCRT and Brown's?

    Subjectquestions
    Entry08/27/2007 10:56 AM
    Memberoscar1417
    Thanks for the write-up! Some questions:
    CCRT has around $300M of liquidity now after the Barclays deal. To my eye, this isn't sufficient to both fund growth for the next couple of quarters and buy back stock, so it seems like they will have to either curtail one of these activities or raise more capital. Raising capital in this environment seems unlikely, and having some extra liquidity might not be a bad idea either. Do you have any figures for what they would need to spend over the next 2-4 quarters to maintain growth? If the $300M is insufficient, where do you see them getting more capital?
    I have to say that the Devaney thing was a real confidence killer for me. I think they are very fortunate to have so little exposure, but you have to wonder what they were thinking. Even if it hadn't blown up, I would wonder what they are doing investing with a leveraged hedge fund. What was management saying about this deal, if anything, late last year when it was ramping up?
    I understand that GAAP is distorted, so I am looking elsewhere to understand the business. For instance, I'd like to see some figures on the performance of individual deals or lines of business. The fee-based card business for instance shows both up-front provisions and positive cash flows, but what I'd like to see is trends in delinquencies and defaults compared to the rates they charge. Is this provided somewhere? Also, I see the $482M of cash flows from operations year to date, but I assume that this should be offset by provisions for losses, but I'm unsure what the cash costs are as the cards season. I guess what I'm looking for is an understanding of sources and uses of cash, and how management figures their return on invested capital.
    For the charged-off receivables business, other companies in this business (i.e. AACC, PRAA) have had a rough time recently and the recent problems renewed concerns over them. One concern is the increased capital flowing into this space and driving up the cost to buy paper and eliminating the excess returns. Another concern is the company's ability to collect in this environment, since the borrowers may be distressed, meanwhile the companies have nontrivial leverage. What are your thoughts on these concerns?
    The "micro-loan" (i.e. payday loan) business is the one that regulators love to hate these days, and CCRT admits that the regulatory environment is "hostile". I think they have a very tough row to hoe to try and grow this business now, though I guess it isn't very material at this point.
    It is surprising that sub-prime consumer credit has been holding up so well even though sub-prime mortgages are not. Tom Brown posed this question to his readers recently but didn't provide any answers. What are your thoughts? This is really a key question for CCRT, since here we are in the middle of the quarter and bad things are probably still happening in the credit world but we won't see any data for a couple of months. The market is currently unwilling to fund "A" mortgages, much less provide additional unsecured credit to the bottom of the FICO range. I just think it is hard to rule out credit-related impairments over the next couple of quarters, which would further impact CCRT's liquidity and earnings.
    Sorry I guess that was a lot of questions! I have been looking at them pretty and am having trouble getting comfortable with them. Thanks in advance for any insights.

    SubjectQuestions
    Entry08/27/2007 11:15 AM
    Memberdavid101
    Timothy,

    Have some questions for you:

    1. With the amount of consolidation that has occurred in the credit card industry over the past ten years, what type of opportunites are left to buy managed portfolios?

    2. What do you make of their investment in JRAS, the used car dealer/lender?

    3. Related to the first two questions, it looks like they are acquiring new lines of business. The concern is that diversification becomes deworsification.

    4. Why doesn't the Hanna family take the company private?

    David

    SubjectEarnings misses
    Entry08/27/2007 12:53 PM
    Memberrii136
    Thanks for the idea. Couple question:

    1) How much of the earnings misses over the last couple quarters was due to the impairment on the hedge fund investment? From what I can tell, even taking this loss into account, it looks like earnings were down YoY.
    2) What makes you confident that they can grow this business going forward? What is the value proposition to the consumer that makes this product special?

    Thanks,
    rii


    Subjecttangible book & roe
    Entry08/27/2007 02:47 PM
    Memberhbomb5
    Guess I'll join the line of questions, here.

    How do you to value them from a tangible book perspective? At some point there should be an argument for retained earnings and ROE building book.

    Some folks have already alluded to funding, so whatever color that you can add to the credit card securitization market, particularly how CCRT does it would be helpful. The fact that they securitized the Barclay's portfolio with B of A implies that their funding is more like a factoring facility than the subprime securitization sausage machine used for mortgages.

    SubjectSecond Curve
    Entry08/29/2007 07:58 PM
    Memberelan19
    Nice writeup and I am intrigued enough to have done a bit of work on this in the last couple days. I like the strong balance sheet (with very long-term convertible debt financing), and it's hard to see losing money on this stock if held for several years.

    However, given the points you made about the limited effective float, it seems reasonable to also mention the short term risk of Tom Brown being forced to reduce Second Curve's position in this stock. According to 13F-HR's, the number of shares owned by Second Curve were:

    Dec 31: 4,925,010
    March 30: 5,176,010
    June 30: 4,728,891

    Given that various Second Curve funds were purported to be down between 38% and 42% as of the end of July, I would think that there could be short term selling pressure between now and the end of the year as Second Curve may be forced by redemption requests to reduce holdings in this stock (Unless Second Curve has multi-year lockups for most or all of its limited partners - anyone know if he does?)

    Thanks for the idea.

    SubjectJudging by the stock price, CC
    Entry08/30/2007 02:24 PM
    Membercanuck272
    Judging by the stock price, CCRT got hit hard in the past recession, with the stock falling from a peak of $60 in the fall of 2000 to a low in the mid single digits during 2002. What happened then, and how relevant is that history to today?

    SubjectLiquidity update?
    Entry08/30/2007 03:02 PM
    Memberelan19
    I did not understand your comments about a liquidity update. Are you referring to the 424B7 filing of 8/29/07? If I understand this filing correctly (in conjunction with previous filings), it basically says that:

    Compucredit issued $300,000,000 of 5.875% convertible senior unsecured notes in November of 2005 (registered 3/10/06 so that they could be resold)

    Bear Stearns declared for resale $70,500,000 on 4/3/06, increased this to $73,150,000 on 4/14/06, and just increased this further to $84,150,000. But all funds for this unsecured note were collected in November 2005.

    Am I misunderstanding something? Were you referring to something else with your comment?

    SubjectQuestions
    Entry08/31/2007 12:17 PM
    Memberroark304
    Thanks for the writeup.

    (1) In the follow up thread, you said you thought the August securitization facility shows that the $300 fee-based card business is perceived as sound. Is your conclusion here based on the specific terms of filed supplement or just the fact that they were able to secure financing of any type on any terms in this environment? I believe CCRT had $957m in gross principal and fees receivable ($553m net of allowances) from the fee-based business as of Q2. If the entire fee-based balances serve to overcollateralize borrowings under the facility to the extent where the gross haircut is near or in excess of 50% (I don't know if they do), it might be hard to say that the financing represents any kind of a vote of confidence on the soundness of the underlying business. Do you have better insight on the indenture terms?

    (2) You point out that CCRT sees run rate managed earnings in the area of $6 or so. This would imply a return on managed receivables in the range of 9% or so and returns on CCRT's tangible equity at aroudn 40-50% even using their current overcapitalized structure; in my experience, those kind of returns are unprecedented in pretty much any credit card business at any time (by a few multiples, not percentage points), let alone on average and over time. I can't understand from your writeup what gives you confidence that CCRT has developed a model that can achieve those kind of groundbreaking returns in a very competitive business.

    (3) You offer some of the economic assumptions underlying the fee-based card model. I have three questions about these assumptions.

    (a) Other than management estimates, have you found any data or information to validate the 20% net charge off expectations for this business over time?

    (b) My dim understanding is that when these cards are activiated, annual and activation fees are immediately charged against the card limit. Cards are generally charged off after they are delinquent for six months and peak charge offs for this product occur around month eight. How do your expectations for fee and interest write-offs (as opposed to net charge offs of principal) play into your assumptions for the economics of this business?

    (c) Historically, some lenders have cited onerous collection and operating costs due to low account balances -- particularly in bad times -- as reasons this fee-based super-subprime business is less attractive than it looks. Have you made any additional assumptions about the steady state per account operating costs of the fee based low limit business and how it affects the ultimate economics of the product?

    (4) Their 10Q says that the FTC/FDIC have already proposed significant customer reimbursement and payments of fines to resolve their marketing investigation. Often these kind of investigations blow over, but the specific proposal of reimbursements and fines jumped out a bit. Do you have any idea of the potential scope of these proposals?

    Thanks in advance.




    Subjectlame response
    Entry08/31/2007 03:53 PM
    Memberoogum858
    I am sorry. I guess there are some people who would rather just post their long ideas and leave it to other people to do their own work. .but I don't think that's the idea of this board. . this was launched as a response to the yahoo message board, remember?

    1) "Most posters strongly believe in their ideas" - YES, but most of us aren't here just to pump our favorite ideas. We're here to ask questions about ideas, we're here to subject our own ideas to some critical thinking, we're here to have intelligent people test our bull theses, and we're here to engage in discussions about some of our best ideas and see if they hold up to hard questioning. Most importantly, we're here to learn and get better, which is something that doesn't seem to interest you.

    2) "Each of us has different circles of competence" - YES, but clearly this industry is not in yours, or you would not refuse to respond to every smart question about CCRT. In a previous post you basically dodged a question and said "go ahead and short the stock". . . this response is even worse. Roark is one of the veterans of this board and he has contributed many great ideas and entertained many long threads about those ideas. If you can't handle people challenging your idea, why post at all?

    3) I think many value investors will get burned looking for gems in the wreckage in the financial services sector. These businesses just don't let themselves to accounting very well. So there are often very many unanswered questions. Because of this, investors like Tom Brown put a huge emphasis on judging management and establishing a close relationship with them.

    4) Your response is basically, "Feel free to call Tom Brown, who is very smart and is long the stock."

    Value guys traditionally find their best ideas in corners of the market where there is panic. . but I wonder if panic in financial services and relative calm elsewhere will lead some people into trouble.

    best of luck with your ccrt. i hope, for your sake, that Tom Brown is right.


    SubjectVarious
    Entry09/01/2007 08:46 PM
    Membercharlie479
    >Maybe I'm reading this wrong, but my take on Oscar and Roark's post was that they aren't buyers of CCRT. And anything I say ain't gonna change their mind.

    There are lots of us in the peanut gallery who are still formulating a view on CCRT. Even if you don’t think you can change Oscar’s or Roark’s mind, it may still be worth it to answer their questions because you can help the rest of us make up our minds.


    >If that's the case, I see no point to endlessly answering their queries.

    The other benefit to addressing the opposing views is that it helps to vet your thesis. It’s better to hear out and examine disconfirming evidence than it is to develop a habit of telling people after a few replies to go short the stock and see who’s right in a few years when we look at the market cap. I’d rather read a civil Q&A to try to determine who is right *today* because my discount broker has been hiding the button that lets me buy at historical prices after I’ve seen what the market cap turns out to be.

    With that said, I recognize that everyone who posts an idea and takes time to answer questions is giving their time and brainpower without getting anything in return except access to other people’s ideas and answers. If you’ve decided not to answer any more questions on CCRT, then I respect your right to withdraw from the debate and I thank you for sharing your idea and answers.


    SubjectCCRT 3 5/8ths
    Entry03/07/2008 04:45 PM
    Memberconway968
    These converts recently traded at 41. They are puttable in 4 years and convert at $43. Considering where the stock is and their structural seniority to the stock, it seems like the 28% yield and better downside protection might be a better way to play CCRT. Thoughts?
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