Roller Coaster Year for Public ARM Firms

The latest quarterly earnings releases from the major debt purchasing/collection companies in the U.S. are yet another chapter in an extremely volatile year for the stock prices of the public ARM firms.

Encore Capital Group (NASDAQ: ECPG) and Portfolio Recovery (NASDAQ: PRAA) have reported their third quarter earnings in the past week. Asset Acceptance (NASDAQ: AACC) is due to report next week, but issued an earnings warning last week. A fourth public ARM company, Asta Funding (NASDAQ: ASFI), is expected to report their fiscal fourth quarter and full-year results in early December, according to the company’s investor relations firm.

The latest results have been mixed. San Diego-based Encore reported a modest gain in net income, but missed analysts’ expectations by a penny. The debt purchaser also announced a spike in portfolio purchase activity. Still, the stock price has gone up nearly 10 percent in the three trading days since its release. Encore’s share price had been trending downward since it spiked in mid-September on the news that it was cutting costs by exiting the volatile healthcare sector and cutting jobs.

Portfolio Recovery Associates, based in Norfolk, Va., yesterday also reported solid but unspectacular results for the third quarter. PRA reported a modest rise in income in addition to a jump in portfolio purchase activity. In trading Tuesday, investors had the stock trading slightly lower.

Warren, Mich.-based Asset Acceptance Capital Corp. said on Thursday of last week that it would be reporting between $13 million and $15 million in revenue impairments in its third quarter ("Asset Acceptance to Post $15 Million in Revenue Impairments," 10/26). Final results are due on November 6. Asset Acceptance’s stock fell sharply in late and after-hours trading Thursday – as much as 16 percent — but has rebounded to early Thursday levels as of the end of the trading day Tuesday.

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The latest quarter’s results marks a very turbulent year for the stock prices of the four major publicly-traded pure-play ARM companies. Three of the four – PRA, Asset, and Encore – are down for the year, when compared to trading levels on January 3. Asta beats the trend, trading 15 percent higher than it did at the start of the year. But all of the companies experienced huge spikes and drops at some point in the year.

PRA has had the craziest roller coaster ride in terms of dollar-amount swings. The company’s stock opened 2007 trading at around $47. On July 19, it had leapt to $65.60, a 52-week high. But by the beginning of the fourth quarter, it had fallen to $54, and has fallen steadily to current trading levels of around $46.50 to basically break even for the year.

In terms of percentages, Asset Acceptance’s stock price ride has no rival. It started the year at $16.50 and traded between $19.05 and $8.50 just from June to August, a 55 percent difference.

According to research notes from an analyst that covers both PRA and Asset Acceptance, different factors may have caused the share price turbulence rather than one unifying issue in the industry. John Neff, an analyst with William Blair & Company said in a research note last week on Asset Acceptance that PRA has not experienced the impairments that Asset Acceptance has seen on portfolios purchased in 2005 and 2006. Asset Acceptance has reported significant impairments every quarter this year, leading investors to react when the news is broken.

But Neff commented in a separate note on PRA this week that staffing issues specific to the company may be factoring into some of the volatility. PRA opened a new call center in Jackson, Tenn. last year ("Portfolio Recovery Associates Establishing New Call Center in Jackson, TN," 11/16/06). The town has a population of around 60,000 in relatively rural East Tennessee. While PRA has recruited well in the town, many of the collectors are inexperienced, leading to increased costs in ramping up the workforce and a decrease in collector productivity, one of PRA’s key operational metrics.

Encore’s 2007 has been just as active as PRA and Asset Acceptance’s. The company’s stock price peaked in November of last year and had been on a steady downward trend until it spiked in late April on news that two investor groups were taking a major position in the company. But the company’s stock began to fall again in late summer ($12.50 to $9.50) but has enjoyed a nice upward trend ever since. For the year, Encore traded between $12.75 and $9.30 and is currently trading at around $11.30.

The only success, so far, of 2007 has been Asta Funding. The Englewood Cliffs, N.J.-based company opened the year at about $30 and is currently trading at $34.60. But, true to form with the other ARM companies, it has been an up-and-down ride for Asta. Asta was trading in the mid-$30s late last year when it missed analysts’ estimates for its fiscal first quarter and was sent down to around $30. The company then enjoyed a long and steady rise over the first part of the year to its 52-week high price of $46.50 in early April. Since then, the stock price has been falling and spiking, but trending steadily downward to its current price of $34.60.