Despite the recent market slide, many large Australian companies are still trading for lofty multiples, and investors waiting for the valuations of Aussie blue chips to come back down to earth may have to wait a while yet.
That makes now a particularly good moment to look to small or mid-cap ASX stocks not swept up in the bull market and whose prospects aren't as tied to large-scale, macroeconomic growth.
Here's one: Credit Corp (ASX: CCP).
A turnaround on its very best behaviour
Advertisement Today, the Sydney-based receivables management company has a market cap of about $420 million, putting it in firmly in mid-cap territory.
Scratching your head at the term “receivables management”? It's the polite way to describe debt collection. Credit Corp's primary business involves acquiring the rights to unpaid personal and small business debt and then attempting to collect it. In ultra-simple terms, the company makes money when it collects more than it spent on the debt acquisition.
The shares are currently trading for less than 14 times earnings or about three times sales. The high-quality nature of the business, the relatively high margins, and the company's chance of future growth more than justify these multiples.
This hasn't always been the case. After a series of mis-steps and earnings downgrades in 2008, Credit Corp brought in a new chief executive and set about paying off over $100 million in debt.
The company's balance sheet and profitability have dramatically improved. In a November 2012 speech to shareholders, chairman Donald McLay summarised the company's transformation succinctly: “Over the four years to June 30, 2012 net profit after tax has grown at a compound rate of 46 per cent per annum and the company is almost debt free.”
While one can't reasonably expect net profit after tax to continue to grow at these levels, Credit Corp's core business and expansion initiatives both internationally and domestically appear promising indeed.
What's more, Credit Corp is a company well positioned to perform even better in the event of an economic downturn – making it a nicely defensive holding as well as potentially promising long-term holding. (In the event of a recession, it stands to reason consumer and small business debt will increase, and the price of this debt could be more favourable to buyers like Credit Corp.)
US expansion and new consumer lending division
In June 2012, Credit Corp purchased a US collections agency. Its US purchased debt ledger stood at $4 million as of the most recent half year, and “further purchasing and expansion is planned” according to company presentations.
If Credit Corp's management can execute well on this initiative, the US could prove quite a large market for the company, allowing for years of growth.
The company has also opened a new consumer lending business called MoneyStart in Australia. The division offers small loans to customers with less than perfect credit – a demographic in which Credit Corp has considerable expertise, and which should make for sound underwriting.
The total value of the loan book stands at around $12 million, and it seems likely there is substantial room for further growth in this segment too.
Both these growth initiatives should begin contributing to the bottom line in the next few years. The groundwork has already been laid.
Foolish takeaway
An investment in Credit Corp is not without risk. First and foremost, it's important that Credit Corp not overpay for the debt it purchases in Australia and in the US, and that the company remains disciplined.
However, the company is building a successful track record and its future appears bright – especially in the light of the reasonable price Mr Market is asking today.
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