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Is small-cap Pioneer Credit Ltd a screaming bargain?

The small-cap debt collector Pioneer Credit Ltd (ASX: PNC) share price rose 4% to $2.55 today, after the company released its earnings guidance for financial years 2017 and 2018.

While the forecast is unaudited, the company expects to report net profit after tax (NPAT) of $10.7 million in 2017, and “advises that it expects to increase NPAT by over 49% in FY18 to at least $16m.”

With a market capitalisation of just over $150 million, Pioneer Credit is priced at 15x its estimated full-year profit for 2017, and 9.5x its guided profit for $16 million in financial year 2018.

This is very cheap relative to the wider ASX, whose average price to earnings (P/E) ratio is around 16 times. This is comparable to competitors Collection House Ltd (ASX: CLH) and still measurably cheaper than giant Credit Corp Group Limited (ASX: CCP).

One small-cap fund manager has been very bullish on Pioneer Credit and done very well out of it for their investors. However, for the household investor, it’s important to know the general drivers of these earnings:

  • Ability to buy distressed debt at attractive prices (gets harder if competition heats up)
  • Ability to collect on said debt (gets harder if the economy struggles)
  • Earnings can be lumpy and/or suffer for several years afterwards if a company reduces its debt buying program for whatever reason (i.e., debt purchased now can contribute to earnings for several years in the future)

Some readers may know that Collection House Ltd remains in the doldrums partly because previous management restrained its debt buying program in response to high debt prices. So while Pioneer does appear cheap, and investors in it have rightly done well, it’s also important to keep an eye on factors which may impact its earnings (positively or negatively) in the future.

Here are 5 more cheap investment ideas to consider at today's prices:

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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