THE POET Ralph Waldo Emerson wrote: "Pay every debt, as if God wrote the bill."
Either consumers have never read Emerson, or they simply don't mind living under the crushing weight of their mounting bills.
Consumer debt surged to about $5.8 trillion as of Sept. 30, up from $3.6 trillion in 1990, according to the Federal Reserve Board. An estimated $164.5 billion is delinquent, industry experts say.
But there is a bright side to the bad-debt boom.
It has spawned a thriving industry that collects everything from unpaid health care and credit-card bills, to delinquent mobile phone bills and child-care payments.
"The growth opportunities as an industry by sector are tremendous," said Michael D. Ginsberg, vice president at M. Kaulkin & Associates Inc., a Bethesda-based mergers and acquisitions advisory firm specializing in the collection industry. "From an investment standpoint, you want to look at a growing, profitable industry where the trends are strong. This industry speaks to that."
What makes the collections industry so compelling, experts say, is its size and money-making potential.
The industry, which generates an estimated $10.5 billion in annual revenue, is made up of several segments, including companies that specialize in collecting delinquent bills and those that manage billing for credit grantors, such as hospitals, the federal government and utility companies.
Collecting delinquent credit-card loans, for example, is an industry in itself. U.S. banks have $4.43 billion in delinquent loans on their books, and credit-cardholders haven't tapped the more than $2 trillion available to them on their cards, according to Veribanc Inc., a Wakefield, Mass., bank rating and research firm.
The Nilson Report expects gross credit-card write-offs to jump to $51.8 billion in 2005, up 65 percent from $31.3 billion in write-offs last year.
What may also interest investors is that unlike cyclical industries, such as steel, chemicals and heavy equipment, the debt-collecting business' fortunes don't fluctuate as wildly when the economy moves from one cycle to the next, experts said.
When economic times are good, people in debt make regular payments on late bills, and when times are bad, the business explodes as more consumers fall behind on payments.
"It has a nice defensive characteristic to it," said William A. Warmington Jr., an equity analyst at the Atlanta brokerage, Robinson-Humphrey. "As an investor, you definitely want to have exposure to bad-debt collection."
The debt-collecting business is highly fragmented with 6,300 companies in the nation; many are mom-and-pop operations, and privately held. But more companies are merging, creating larger firms that may go public.
There are a handful of firms whose shares are traded, including Fort Washington, Pa.-based NCO Group Inc.; Creditrust Corp. of Baltimore, which raised $31 million in an initial offering last July; New York-based Compass International Services Corp.; and Cypress Financial Services Inc. of Cypress, Calif.
One of the industry favorites is NCO Group, the largest of the four with a $660 million market capitalization, and a track record for making money. Last year, the firm was included in Business Week magazine's "100 Hot Growth Companies."
Warmington said NCO's income and revenue are growing at a 30 percent clip, and his target price for the stock is $50 per share in the next six months to 12 months, up from the $36 range.
"NCO is the premier company in the sector," Warmington said.
Ginsberg expects as many as a half-dozen companies in the debt-collection industry to tap the public markets next year after a flurry of mergers.
"I think this industry is here to stay," he said. "The industry has grown out of necessity."
There is little doubt that consumers will keep the collection business humming with a seemingly endless supply of bad debt. Since Thanksgiving, consumers have charged $3.4 billion on their Visa cards, up nearly 10 percent from the prior year, with the number of transactions jumping 13 percent to 53 million, according to Visa U.S.A. Inc.
Surely, such behavior would disappoint Emerson. But others see it simply as business, and another money-making opportunity.
"Imagine what [the collections business] is going to be like if the economy goes into the tank," Warmington said.
Pub Date: 12/27/98