Crazypunter
CLH dropped about 5% Friday – “tanked” as your exuberant writing style put it. Whether the reason related to something fundamental to the CLH business, or whether it was due to the vagaries of Mr Market, I do not know. Both could be at play – a gloomy outlook for 2016, and directors' selling pressure.
As you wrote, CLH's management opined that PDL's will be expensive, and hence CLH expected to invest less in them. This does not mean that the PDL's will be expensive, especially as other players in the market seem to think the opposite. CCP's Annual Report stated, “A moderation in price growth from late in the first half facilitated the successful renewal of expiring forward flow contracts along with additional volumes. PDL acquisitions were $87 million in the second half, compared with $56 million in the first half. A solid pipeline of purchases has been secured for 2016.”
I suspect, but do not know, that CLH's real problem may be that it forward-shifting profits in 2015 by amortising PDL's too low – CLH netted collections down by a lower percentage (42%) than CCP did (47%), but there could be valid reasons for the difference, and why CLH's amortisation was lower than previous years. CLH's Annual report states, “During the year, the rate of expensing assets (Amortisation rate) averaged 42 percent [of collections] over FY15 and has remained in tight range of 42-45 percent since FY11.” A suspicious person would ask the question, “Who gained?”. 2016 may be CLH's adjustment year, and blaming macro factors for a slow-growth 2016 could just be an excuse. Because I do not hold CLH, I am not going to invest time verifying my suspicion, and nutting out how CLH has for years been able to record an EPS growth that I cannot reconcile to its ROE and Dividend Payout Ratio – see metrics below. In loose terms, EPS growth should equate to ROE x Retained Earnings, although a growing NPAT margin and growing leverage complicates the calculations.
....................... 2008/6..2009/6..2010/6...2011/6,..2012/6,..2013/6,..2014/6...2015/6
EPS cents .......... 5.7 ….. 7.2 …... 9.1 ..... 10.3 ...... 12.3 ...,.. 13.6 .... 14.5 ..... 17.1
EPS growth ................. 26.3% .. 26.4% .. 13.2% .. 19.4% .. 10.6% ... 6.6% .. 17.9%
DPS cents .......... 4.7 …... 4.9 …... 5.8 …... 6.1 .…... 6.4 …... 7.2 ….... 8.0 …... 9.3
Payout Ratio .. 82.5% .. 68.1% .. 63.7% .. 59.2% .. 52.0% .. 52.9% .. 55.2% .. 54.4%
ROE ................. 6.4% ... 8.0% ... 9.7% ... 10.5% ... 11.6% .. 12.7% .. 12.0% .. 13.2%
On Mr Market, I understand from a quick glance at HC posts that two CLH directors with significant holdings have been selling out over the period when Motley Fool has been recommending CLH. Large exits from a stock always depress the SP, and in this case, Motley Fool's recommendations would have ameliorated that effect. Director selling may, or may not, be based on the future performance of the business.
On Motley Fool, I have never bought a stock based on MF's opinion, and in respect of CLH, I am on record of favouring CCP as the better bet in the PDL game. The article written by Matt Brazier, and published by MF, did not support MF's pro CLH line, and I pointed this out in an HC post. That you know that I think MF is the ants pants, and that I keep saying so does not surprise me, even though it is news to me. I could be becoming forgetful, so do me a favour and let me know where I am on record of extolling MF. I wonder why I cancelled my subscriptions to two of their services?
On your comments about being naïve, fundamental analysis and cans of worms – punting and investing are different ways of playing the ASX, and debates between the adherents of both sides are usually futile. They are like the fruitless jousts between differing religious believers, or believers in evolution and creationists, or socialists and those of an Adam Smith frame of mind.
Getting back to CCP, there are potential threats to CCP. A change of management style, for instance. After the subprime crash in the USA, the regulation of third party debt collectors made life for Encore and others, including CCP's small USA business difficult. Encore responded by shifting focus internationally, and CCP responded by treading water in the USA. The same could happen here if politicians see a vote-garnering advantage in beating up debt collectors and cosseting the welshers. In spite of these potential threats, some weeks ago I increased my CCP holding by 1200 shares, and would have bought more if I had the funds.
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