PRAA - Heritage Global: Profiting From Recessionary Fundamentals Yet Investors Misunderstand The Business Model

2024-03-08 07:25:04 ET

Summary

• Initiating coverage on auctioning, liquidation and non-performing loans service provider Heritage Global.
• Discussing how HGBL capitalises on current macroeconomic catalysts, though liquidity in the stock has been low, indicating market inefficiencies.
• Last year, the stock trended down amid uncertainties within the loan financing business, an entity that contributes to a small extent to the company's consolidated operating income.
• With bankruptcy filings trending higher and non-performing loans approaching volumes not seen since the great financial crisis, HGBL's profitability should improve substantially this year (Rating: Buy).

Heritage Global ( HGBL ) stock is flat year-to-date, up 12% year-over-year. After the company announced that their largest borrower was granted a loan refinancing, the stock plunged more than 20% since November last year. However, investors seem to miss that this only affects one of their four operating entities, for instance, the entity with the lowest contribution to the company's earnings. Meanwhile, HGBL's industrial auction, resale and valuation businesses continue to grow amid a favourable macroeconomic environment, high interest rates in particular, as bankruptcy filings have started to trend higher. In addition, HGBL financial assets continue to capitalise on increasing charge-off volumes in the non-performing loan (NPL) market. As HGBL is already profitable, this indicates further earnings growth lies ahead with the stock being set for a run up (Rating: Buy).

HGBL's "Rocky Roads" business model

HGBL operations encompass five different business entities, which is likely a reason why investors bypass this stock. Though the prospects of those businesses are highly exposed to macroeconomic distortions. With words of the company's CEO underlined recently: "Rocky Roads have been ice cream to liquidators", while the outlook is "going to get better and better over the next 2 or 3 years". That being said, HGBL allocates three of its entities to "industrial assets", whereas the other two comprise of the "financial assets":

Heritage Global Partners (HGP): Full-service auction, liquidation and asset advisory firm that provides services for companies in over 25 sectors. The company's history, formally the Ross Mercantile Company, goes back to 1937. The family business was acquired back in 2012, while owner Ross Dove became CEO of HGBL....

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