Collection House or Credit Corp: Which could give you the better return?

In its AGM presentation for 2013, Credit Corp Group (ASX: CCP), an accounts receivable management and debt collection service provider, announced that actual cumulative collections were above its initial projections for accounts. This spread has been widening for the the company since 2009.

The company manages or buys accounts receivable books from companies at a discount to take over collection of the debt, so the larger amount of debt they can collect, the larger the returns on their investment in buying the purchased debt ledgers (PDL). When actual collections are more than even their projections, the earnings are even better.

It is expanding its PDL business into the US, which is a much bigger market than Australia, but competition will be greater, too. Business ties with established debt collection agencies over there are being cultivated to help the organic growth.

Over the past five years, the company has grown its net profit after tax (NPAT) by an average 42.9% annually, although this high pace has slowed to about 33% within the past three years.

This outpaced its market competitor Collection House (ASX: CLH), which achieved a 20.5% compound annual growth rate (CAGR) over the past three years. In 2013, Collection House’s NPAT was up 23.1% to $15.6 million and had a return on equity of 12.7%.

Credit Corp Group netted $31.9 million on revenues of $142.3 million, and its share price has gone from about $3 to almost $10 in the past 3 years while during the same period Collection House has risen from about $0.75 to $1.80.

Collection House is a $220 million company, approximately half of the market capitalisation of Credit Corp Group’s $441 million. Their price-earnings (PE) ratio are close- 12 and 13 respectively, but I would rather have the past 3-year track record of 33% CAGR over the 20.5% CAGR for roughly the same PE.

Foolish takeaway

Both companies are doing well, and earnings are growing at attractive rates. If they can continue the same over the next five to ten years, you wouldn’t lose by buying either.  But as investors, we have to look at the long term, so even a small difference in the rates of return now can mean huge gaps in the future.

Set your return goals, and stick with them. When good companies have bad years, take advantage of the buying opportunity, yet still, amongst them choose the best performers for the long haul.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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