Credit Corp Group Limited (ASX: CCP) and Collection House Limited (ASX: CLH) make money by collecting debt on behalf of other businesses. They are the two largest debt collection companies in Australia today. Both were founded in 1992, indicating that the industry has only been around for a short period and so is likely to keep growing for some time.
Whilst Credit Corp and Collection House operate in the same industry, there are differences between the two businesses. Collection House takes a commission for recovering debt, buys debt at a discount and offers training services on debt recovery, all in Australia. Credit Corp buys debt in the US and Australia and lends money to people with poor credit history.
If you were going to buy one of them, should it be Credit Corp or Collection House?
Growth
Over the last four years, Credit Corp has grown diluted earnings per share by 26% per year on average compared to just 12% for Collection House. Credit Corp's advantage is not just the result of cutting costs since it has grown revenues by 17% per year over the same period compared to just 10% for Collection House.
Winner: Credit Corp
Financial strength
Credit Corp's weighted average profit margins over the past four years are 21% compared to just 15% for Collection House which suggests that Credit Corp is a better managed operationally. Perhaps it buys debt at better prices or is more efficiently staffed, either way in my opinion it is better protected if industry conditions deteriorate.
Credit Corp's superior margins help to explain why its return on equity has averaged 23% over the past four years compared with just 12% for Collection House. For every dollar of shareholder money invested in Credit Corp, 23 cents is returned each year compared to just 12 cents for Collection House.
Credit Corp has $28 million of net debt compared with Collection House's $111 million. Given Credit Corp makes nearly double the profits of Collection House, it is far more conservatively geared making it a less risky business and giving it more flexibility to grow. Impressively, Credit Corp has maintained its stronger balance sheet despite growing more rapidly than Collection House.
Winner: Credit Corp
Price
Credit Corp has an enterprise value of $580 million and currently makes around $38 million in profit per year, giving it an enterprise value to earnings ratio (EV/E) of about 15x. Collection House has an enterprise value of $390 million and makes about $22 million in profit per year and so has an EV/E of 18x.
Winner: Credit Corp
Foolish takeaway
Clients of Credit Corp and Collection House are motivated by price and it is not hard for competitors to enter the market. Therefore, as the industry matures, margins will get squeezed to the detriment of all. Those companies that are disciplined and only buy debt when prices are favourable are likely to be most successful over the long term, but in the meantime both Credit Corp and Collection House should thrive in a growing market.
However, out of the two companies, Credit Corp is the better investment opportunity today in my opinion.
