Why the Credit Corp Group Ltd share price is tumbling today                   

Are Credit Corp Group Ltd (ASX:CCP) shares really cheap?

| More on:
Mortgage

Credit: Chris Potter

Shares in debt collection business Credit Corp Group Ltd (ASX: CCP) have dropped nearly 3% to $17.50 today despite the company providing a seemingly strong result for its first half of financial year 2017.

For the period the group reported a net profit of $25.2 million on revenues of $129.1 million with earnings per share (EPS) coming in at 53.2 cents. The profit and revenue were up 19% and 15% over the prior corresponding period, with the group reconfirming guidance for full year profit between $53-$55 million, up around 15% to 20% on the prior year.

The group also seemed to enjoy a relatively benign debt ledger pricing environment with collection efficiency labeled as in line with the prior year. Its main listed rival in Australia in Collection House Limited (ASX: CLH) flagged challenging conditions in early 2016, although Credit Corp appears to have not encountered similar problems.

The group also has a small but growing consumer-micro-lending business which is a sector that in general has been buffeted by regulatory pressures in recent times, although it seems to be performing reasonably well.

Its only real weakness has been its loss-making U.S. operations, where it appears to have found debt buying and collection markets a little too hot to handle, although it reported that losses in the region were reduced by 50% compared to the pcp.

The reason the share price has come under pressure today is probably more to do with investor expectations than company performance, as the stock at $17.54 trades on around 16x the company’s forecasts for total EPS in FY16 even after today’s price falls.

Given it also offers an expected yield in the region of 3.2% this may sound cheap, but investors should be aware that debt collectors traditionally trade on low earnings multiples due to the limited short-to-medium term earnings visibility.

In my opinion then the stock looks around fair value, as despite the strong track record it would not be a big surprise if pricing in the debt markets in which it operates edged higher over the years ahead.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

Motley Fool contributor Tom Richardson has no position in any stocks mentioned. You can find Tom on Twitter @tommyr345 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.

More on Investing