Three Public Debt Buyers Hit with Analyst Downgrade

Three of the major publicly-traded ARM companies were downgraded Monday by a single analyst that cited an increasingly difficult collections environment in a flagging economy as a primary motivation in the move.

Asset Acceptance Capital Corp. (Nasdaq: AACC), Encore Capital Group (Nasdaq: ECPG), and Portfolio Recovery Associates (Nasdaq: PRAA) all saw their ratings get moved from “Buy” to “Hold” by New York-based investment bank Jefferies & Co.

In three separate research reports, analyst Richard Shane, Jr. noted that a “deteriorating consumer credit environment” caused by a protracted downturn in the economy will negatively impact cash collections at all three firms and drive up operating costs. “We believe certain credit sensitive stocks will have limited upside until the depth and length of the credit downturn is more fully realized,” he wrote.

On the positive side, Shane believes that the economic environment will spur an increase in charge-offs and that all three debt purchasers will have access to more debt and at lower prices. But the increase in cheap portfolios will not be enough to offset a weak economy. Jonathan Philpot, an analyst in Shane’s group, told insideARM that last week’s alarming jobs report reinforced the thinking in their group (“Jobless Rate Hits 5 Percent, Market Tanks,” Jan. 4).

The move from buy to hold was also part of a shift in coverage at Jefferies as Shane’s specialty finance group assumed coverage from Dan Fannon within the firm. Philpot said, “[Shane] thought it would be prudent to assume coverage with a ‘Hold’ rating.”

Shane wrote that of the three companies, Norfolk, Va.-based Portfolio Recovery “is best positioned to benefit once the credit environment improves.” Shane put a target price of $41 on PRAA’s stock, which closed at $32.93 in Wednesday trading.

San Diego-based Encore had a target price of $10 placed on its shares. Encore’s stock closed at $7.70 Wednesday. Shane also noted that Encore will see operating expenses increase due to the firm’s shift toward more legal collections.

Asset Acceptance, based in Warren, Mich., had its shares tagged with a $10 price target as well. But the company’s stock traded much closer to that target in trading Wednesday, closing at $9.26. Shane wrote that in addition to the issues plaguing the other two debt buyers, Asset Acceptance’s recent run of high impairments on its portfolios will be a potential hurdle to share price growth.