Consumer Portfolio Services, Inc. (NASDAQ:CPSS)

szgabor (< 20) Submitted: 10/12/2008 4:20:18 PM : Start Price: $5.73 CPSS Score: -72.58

We have to pay attention to the two USD 200 million warehouse credit facilities of the company. One has matured on the end of September, the other has a maturity of Nov. 8. Unless the company manage to renew these facilities (even in smaller amounts) it have to cease its operations. Simply the existing USD 70 million and USD 25 million facilities aren't enough to finance the purchase of new contracts.

doggetla (70.71) Submitted: 10/29/2007 5:27:40 PM : Start Price: $5.01 CPSS Score: +70.13

jumped on this one just before the big "finaical crash" re-upping at a lower price

kringle01 (< 20) Submitted: 10/23/2007 11:19:11 PM : Start Price: $5.06 CPSS Score: -70.58

Way undervalue. Finance Market will take couple of year to work out the loss.

MJKscorecard (35.67) Submitted: 10/1/2007 10:27:34 AM : Start Price: $5.73 CPSS Score: -73.42

October 1st, 2007

As a good friend of mine “MJAscorecard” has pointed out there is blood in the streets and the financial sector is at the epicenter of this “sub-prime slime.” But, if I recall, it was John D. Rockefeller who said, “The way to make money is to buy when blood is running in the streets.” I will heed your advice Mr. Rockefeller and recommend Consumer portfolio services (NASDAQ:CPSS) – that’s right my friend, sub-prime auto loan slime.

The business

Consumer Portfolio Services was founded in 1991 and grew steadily through the late 90s when it nearly folded into bankruptcy as did most of the industry. Unlike many of its competitors, Consumer Portfolio Services, with Charles E. Bradley at the helm, survived the industry collapse and emerged as leading auto loan lender. With only 2 billion of the yearly 80+ billion in sub prime auto loans the companies opportunity for growth is wide open.

Consumer Portfolio Services is a specialty finance company that provides indirect automobile financing to vehicle purchasers with past credit problems, low incomes, or limited histories. The loans are accumulated into pools and financed through the issuance of “AAA” rated asset-backed securities.

Through its existing relationships with over 8,700 mostly franchised user car dealers in 47 states, its 600+ employees have originated nearly 8 billion in auto loans and have about 2 billion in loans currently being serviced. The average loan is just over $15,000 with an APR of 18.1% for 63 months. 17% of the company’s clients are home owners.

The Financials

I won’t even begin to pretend to be an expert in understanding securitization or accounting, but I will give you a few words from a lay man: As securitization goes, the parts (individual loans) are valued much less than the sum of its parts (securitization) by a rough spread of 12% (18%-6%) in the case of sub prime auto loans. Once a securitization takes place there are two methods for accounting: 1.) gain on sale or 2.) structured financing. With the gain on sale method the company reports profits based on expected earnings from future financing and securitization. This accounting method is ripe for abuse; consider Enron, New Century Financial, Accredited Home Lenders and the foray that followed. On the other hand Consumer Portfolio Services uses a much more conservative method of accounting known as structured financing which reports actual profits while front loading expenses and back loading profits. The company transitioned from a gain on sale to structured financing in 2003.

An excerpt from their annual report: "These changes collectively represent a deferral of revenue and acceleration of expenses, and thus a more conservative approach to accounting for our operations compared to the previous securitization transactions, which were accounted for as sales at the consummation of the transaction. As a result of the changes, we initially reported lower earnings than we would have reported if we had continued to structure our transactions to require recognition of gain on sale. It should also be noted that growth in our portfolio of receivables resulted in an increase in expenses in the form of provision for credit losses, and initially had a negative effect on net earnings. Our cash availability and cash requirements should be unaffected by the change in structure."

.......................2001....2002....2003....2004....2005....2006....2007(projected)

Revenue...........$63.....$98.....$105...$133.....$194....$279....$370

Revenue growth 0%.....57%.....7%.....26%.....46%.....44%.....%33

Originations......~$650 ~$450 ~$350 ~$450 ~$700 ~$1000 ~1400

Market Capitalization: 122M

Price to Earnings: 3.23

Price to tangible book: 1.04

52 week High: $7.77

52 week low: 4.28

Current price: 5.68

Management

The management team has been led by Charles E. Bradley, Jr. as President and CEO since the company’s inception in 1991. The management team averages 11 years of service with CPSS, which I believe to be impressive given the company is only 16 years old. Given this small market capitalization I sleep easier at night given the officers and directors ownership at just under 20%, including the CEO’s ownership of 6%. Options are granted and exercised on a regular basis, but total shares outstanding are actually down over the last five years due to company buybacks. August 27th, 2007 the company made a significant buy back of 1.5M shares from Levine Leichtman Capital Partners, who was required by his own partnership to liquidate all positions. The 1.5 million shares (5%) combined with the recent insider purchases from 5 different insiders was the final impetus for this month’s pick and my own position in the company.

Risks

U.S. Recession - The largest risk factor would be a recession that would lead to an increase in defaults in current and future contracts, pricing and competition difficulties, loss of lines of credits, and most importantly a reduction in originations.

Regulatory - In the “sub-prime” world it’s not uncommon for legislation to be introduced to “protect” the financially disadvantaged. Charging 27% on a car loan may be viewed as predatory lending by some.

Asset-Backed Securities Market - The sub-prime mortgage market has been devastated and to date has kept its “sub-prime slime” mostly limited to the housing sector. This could change quickly, but Ben Bernanke’s interest rate cuts should be helpful. On September 27th, 2007 the company issued a $295 million securitization under favorable terms.

Opportunities

Improved Dealer Relationships - The number of marketing representatives has grown from 63 in 2004 to 94 at the end of 2006 and quarterly reports for June of 07’ site showed a continued growth in this figure. Improved operational capabilities may also serve to differentiate themselves from other lenders. Americredit, a leading competitor, has over 15,000 dealers, so the opportunity to expand the dealer network is there.

Operational, Infrastructure, and Technological Improvements - The internet has given unforeseen capabilities for client representation which could include arrangements directly with car buyers, partnerships with cars.com, autotrader.com, e-loan, Carmax, and others.

Bottom Line

With a share price of $5.68 and a tangible book value of $5.46 it’s hard to imagine that the price could go much lower, but a few weeks ago it was at $4.28. Moving forward, given past revenue and portfolio growth I believe there is opportunity for a 50% return in 12 months and a 100% return in less than 3 years. I like the growth in revenue, originations, and managed portfolio. I also like the conservative accounting, the management and their skin in the game. Most of all I like the panicky blood in streets “sub-prime slime” discounted price-don’t quite understand. Thank you Mr. Market, is there a discount if I buy in bulk?

chitownjester (91.53) Submitted: 9/20/2007 5:16:02 PM : Start Price: $5.96 CPSS Score: -74.10

Lots of people with bad credit need cars. This company excels at managing the lending risk and making a profit. Street fools and those ignorant of the stock confuse its subprime auto lending with the subprime housing debacle.

ozzy3 (67.55) Submitted: 8/31/2007 12:28:12 AM : Start Price: $5.40 CPSS Score: -75.80

Contrarian magic + patience = the $hiznit.
This one has been given a merciless beat-down by the
sub-prime virus, but a vehicle is NOT real estate.
Big Thanks to 'Hurricane Rick' .... uh .... I mean, Sparky !?

Superoggo (< 20) Submitted: 8/23/2007 2:22:42 PM : Start Price: $5.27 CPSS Score: -76.13

Too many creditors were killed these last weeks. Less competition - more profit.

krumb31 (55.13) Submitted: 8/20/2007 6:38:20 PM : Start Price: $4.90 CPSS Score: -75.74

This is the sixteen inch softball heading your way.

jixiang (56.57) Submitted: 8/20/2007 1:46:02 PM : Start Price: $4.77 CPSS Score: -75.73

Facilitates auto loans, buys them then securitises. Current concerns regarding securitisation and selling overhang from Levine Leichtman supressing price. Disciplined lending history and management experienced through industry cycles should stand the company in good stead and limit downside. If management achives revenue and operating margin objectives this could be a multi-bagger in short order.

xdogg (24.72) Submitted: 4/18/2007 10:12:29 AM : Start Price: $6.47 CPSS Score: -80.25

Seems like a great small cap with a ton of potential at a nice low P/E.

lostbear10 (38.86) Submitted: 4/16/2007 3:46:42 PM : Start Price: $6.40 CPSS Score: -80.04

Watch this stock closely and keep your ears open to upcoming news.

The profit potential is well worth the risk in buying this stock. Will see close to 52 week high over short term.

Zikar (36.55) Submitted: 3/13/2007 3:56:02 PM : Start Price: $6.43 CPSS Score: -86.54

I'm taking this from Roth Capital, not directly, but they gave it a buy rating. (I used my own screen to find it.) The companies debt sucks, but with a collection agency, this is to be expected. I like the PEG, and I'm willing to take a chance with CAPS

j3bajric (< 20) Submitted: 2/15/2007 11:08:59 AM : Start Price: $7.15 CPSS Score: -83.02

it has to go up there is no other way

cma6j (< 20) Submitted: 12/19/2006 10:04:49 AM : Start Price: $6.50 CPSS Score: -84.46

cheap small cap value stock

bbcz (48.51) Submitted: 12/10/2006 1:38:18 PM : Start Price: $6.26 CPSS Score: -83.70

It's FMD for cars!

As for why it's undervalued, check out the 10-Q from the past quarter:

"These changes collectively represent a deferral of revenue and acceleration of expenses, and thus a more
conservative approach to accounting for our operations compared to the previous securitization transactions,
which were accounted for as sales at the consummation of the transaction. As a result of the changes, we
initially reported lower earnings than we would have reported if we had continued to structure our transactions
to require recognition of gain on sale. It should also be noted that growth in our portfolio of receivables
resulted in an increase in expenses in the form of provision for credit losses, and initially had a negative effect
on net earnings. Our cash availability and cash requirements should be unaffected by the change in structure."

So they're being conservative about how they report their numbers via this new accounting measure. Combine that with a nice low P/E and you've caught my interest.