Asset Acceptance Shares Slide on Analyst Downgrade

Shares in debt buyer Asset Acceptance Capital Corp. (Nasdaq: AACC) fell about 12 percent in trading Tuesday after an analyst with Jefferies & Co. downgraded the stock from “hold” to “underperform,” blaming a difficult collections environment and performance against debt purchasing peers.

Jefferies analyst Richard Shane said in the research note that he is expecting a “difficult collections environment” in the second half of 2008. This is expected to impact cash collections as Shane sees slow growth for that measure in the third and fourth quarters. “We continue to expect the growth rate of collections to decline throughout 2008 as energy and food inflation coupled with real estate deflation exerts growing pressure on disposable income,” Shane wrote.

But the downgrade was not solely due to a difficult collections environment. Shane said that Asset Acceptance’s valuation relative to its publicly traded debt buying peers – specifically Encore Capital Group and Portfolio Recovery Associates – “cannot be justified.” He noted that Asset Acceptance’s price-to-earnings ratio is some 50 percent higher than that of its two peers that Shane also tracks.

Shane also noted that the positive impact felt by lower debt portfolio prices right now will be muted in the near term, writing that “the impact from 2008 vintage purchases will be overshadowed during the next few quarters due to a more difficult collections environment and the drag from lower returning 2006 and 2007 vintage performances.”

In downgrading the company’s rating to “underperform” from “hold,” Shane also set a new price target for Asset Acceptance of $8 per share. The shares had closed above $11 on Monday and quickly fell to an intraday low of $8.15 before rebounding to close just above $10 per share.

The company’s stock was up about 1 percent in midday trading Wednesday at $10.30.