|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||1,080||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
|Subject||fee based cards|
|Entry||08/27/2007 10:33 AM|
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?
|Entry||08/27/2007 10:56 AM|
|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.
|Entry||08/27/2007 11:15 AM|
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?
|Entry||08/27/2007 12:53 PM|
|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?
|Subject||tangible book & roe|
|Entry||08/27/2007 02:47 PM|
|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.
|Entry||08/29/2007 07:58 PM|
|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.
|Subject||Judging by the stock price, CC|
|Entry||08/30/2007 02:24 PM|
|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?|
|Entry||08/30/2007 03:02 PM|
|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?
|Entry||08/31/2007 12:17 PM|
|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.
|Entry||08/31/2007 03:53 PM|
|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.
|Entry||09/01/2007 08:46 PM|
|>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.
|Subject||CCRT 3 5/8ths|
|Entry||03/07/2008 04:45 PM|
|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?|