Bear Stearns Likes CCRT
CompuCredit announced that it agreed on March 13 to purchased 2.884 million shares in a private transaction. This transaction accounts for just over a quarter of the company’s 10 million share repurchase authorization and will reduce shares outstanding by about 5.7%. Assuming a purchase price of $27 per share, we estimate that the transaction reduces the company's previously disclosed available liquidity by about 11%. As a result of the reduction in the share count and despite some slightly more conservative assumptions regarding provisions and revenue growth we are increasing our EPS estimates for 2007 slightly. We had estimated EPS for 2007 of $4.11 per share, slightly above management’s guidance of over $4.00 per share.
Given management’s guidance that earnings are expected to be significantly higher in the second half of the year than in the first half and the risk that earnings may not increase as currently expected, we are assuming that only a portion of the benefit from repurchasing shares will be reflected in EPS. The company appears to have taken advantage of recent stock weakness and the apparent need of John Devaney (CEO of United Capital Asset Management) or his company to sell CCRT shares they owned. It appears that CCRT may have paid about $27 per share for the stock as CCRT shares traded between $25.98 and $27.87 on March 13th and between $25.52 and $27.12 on March 14th. The company will disclose the actual purchase price when it releases Q1 results in early May or when it files its Q1 10Q. Following the repurchase of the 2.88 million shares, the company still has an authorization in place to repurchase 7,115,837 additional shares. We haven't assumed any additional share repurchases as the company hadn't repurchased any since the initial authorization in May, 2006.
We view the company's decision to use a small portion of its excess liquidity to opportunistically repurchase shares positively. The company has indicated it has been examining potential investments but hasn't announced any so far this quarter. Few investments are likely to match the returns from share repurchases at these depressed levels. We think few investors believed the company would use its excess capital to purchase shares, an action which should be seen demonstrating management’s focus on generating attractive returns for shareholders.
Credit quality could deteriorate as the company’s portfolio seasons, but the current economic environment remains very positive. Low unemployment should continue to provide a benefit. Although investors appear concerned about subprime mortgage weakness, only about one third of CCRT’s customers are homeowners and at this point sub-prime mortgage industry problems are largely attributable to poor underwriting practices in 2006 and a lack of liquidity for some lenders. CompuCredit’s decision in Q3 to no longer accrue interest and fees on accounts 90+ days delinquent should have a diminishing effect on revenues and chargeoffs after Q1 after initially limiting revenue growth while still contributing to chargeoffs.
Earnings are still expected to be depressed during the first half of the year by heavy marketing spending (we estimate $150 million for the year, $90 million in the first half). EPS are expected to rebound sharply during the second half of 2007; management’s guidance is $3.00 per share in Q3 and Q4. The delay in earning growth may limit stock price appreciation, but if the company is able to finally deliver EPS of at least $4.00 per share as promised (and exit 2006 at an annual run rate in excess of $5.00 per share), we believe CCRT shares could rise beyond the P/E multiple of roughly 12x implied by our price target. We are maintaining our year end price target of $48 and our Outperform rating.
Given management’s guidance that earnings are expected to be significantly higher in the second half of the year than in the first half and the risk that earnings may not increase as currently expected, we are assuming that only a portion of the benefit from repurchasing shares will be reflected in EPS. The company appears to have taken advantage of recent stock weakness and the apparent need of John Devaney (CEO of United Capital Asset Management) or his company to sell CCRT shares they owned. It appears that CCRT may have paid about $27 per share for the stock as CCRT shares traded between $25.98 and $27.87 on March 13th and between $25.52 and $27.12 on March 14th. The company will disclose the actual purchase price when it releases Q1 results in early May or when it files its Q1 10Q. Following the repurchase of the 2.88 million shares, the company still has an authorization in place to repurchase 7,115,837 additional shares. We haven't assumed any additional share repurchases as the company hadn't repurchased any since the initial authorization in May, 2006.
We view the company's decision to use a small portion of its excess liquidity to opportunistically repurchase shares positively. The company has indicated it has been examining potential investments but hasn't announced any so far this quarter. Few investments are likely to match the returns from share repurchases at these depressed levels. We think few investors believed the company would use its excess capital to purchase shares, an action which should be seen demonstrating management’s focus on generating attractive returns for shareholders.
Credit quality could deteriorate as the company’s portfolio seasons, but the current economic environment remains very positive. Low unemployment should continue to provide a benefit. Although investors appear concerned about subprime mortgage weakness, only about one third of CCRT’s customers are homeowners and at this point sub-prime mortgage industry problems are largely attributable to poor underwriting practices in 2006 and a lack of liquidity for some lenders. CompuCredit’s decision in Q3 to no longer accrue interest and fees on accounts 90+ days delinquent should have a diminishing effect on revenues and chargeoffs after Q1 after initially limiting revenue growth while still contributing to chargeoffs.
Earnings are still expected to be depressed during the first half of the year by heavy marketing spending (we estimate $150 million for the year, $90 million in the first half). EPS are expected to rebound sharply during the second half of 2007; management’s guidance is $3.00 per share in Q3 and Q4. The delay in earning growth may limit stock price appreciation, but if the company is able to finally deliver EPS of at least $4.00 per share as promised (and exit 2006 at an annual run rate in excess of $5.00 per share), we believe CCRT shares could rise beyond the P/E multiple of roughly 12x implied by our price target. We are maintaining our year end price target of $48 and our Outperform rating.
posted by Never-Limp at 7:21 AM
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