Kerrisdale Capital details the long case for JGWPT Holdings Inc (NYSE:JGW)

JGWPT Holdings

JGWPT Holdings the Undisputed Industry Leader

JGWPT Holdings Inc (NYSE:JGW) has 60-70% share in its core structured-settlement market; no competitor comes close to its scale. Settlement sellers typically sell only a fraction of their future payment streams in any one transaction, and then conduct follow-on sales as needed. Because JGW has the most recognizable brand and largest database of leads, it enjoys a steady flow of repeat customers, accounting for half of its transactions. These repeat customers are cheaper to acquire than new clients and add stability to revenue trends.

Superior Cost of Capital and Robust Cash Flows via Regular Securitization

JGWPT Holdings Inc (NYSE:JGW) is the only structured-settlement firm with access to cheap, consistent institutional funding via the securitization market. Having the lowest cost of funds in its sector allows JGW to offer settlement sellers the best price. In recent transactions JGW has been able to purchase assets at an 11% discount rate while Imperial Holdings, a smaller competitor, has been charging 17% – 18%. This is likely because Imperial funded its purchases through one-off transactions at high yields while JGW can reliably access 4% – 5% financing in the asset-backed securities market.

Exciting Growth Prospects and Ability to Compound Capital Through Bolt-on Deals.

JGWPT Holdings Inc (NYSE:JGW) has historically grown its key business drivers at mid-to-high single-digitrates, and higher interest rates in the future could lead more plaintiffs to opt for structured settlements. Moreover, as the top player in a fragmented industry, JGW has many opportunities to acquire smaller competitors and achieve synergies, yielding returns on capital of more than 25%.

Over time, JGWPT Holdings Inc (NYSE:JGW) can do more to capitalize on its highly effective marketing, which elicits 67,000 inbound inquiries a month, only a small fraction of which it can address with its existing products. By monetizing more of these leads, JGW can boost revenue without adding meaningful expenses. And by expanding prudently in the adjacent domain of pre-settlement funding, it can begin to capture more of the litigation value chain.

Attractive Unit Economics

On average, JGWPT Holdings Inc (NYSE:JGW) buys payment streams at 34% of facevalue and sells them at 60% of face value, for a tremendous gross return on investment of almost 80%. Viewed from a different angle, we estimate that JGW spends $6,700 to

Since JGWPT Holdings Inc (NYSE:JGW) only became public in November, the historical financial information available is limited. Furthermore, because it grew dramatically in mid-2011 by acquiring its largest competitor, Peachtree, year-to-year comparisons are distorted. Still, at first glance, the stock looks very cheap, trading at 7x consensus EPS. This simple conclusion survives a much more detailed analysis. Below we present an overview of our DCF valuation, which gives JGW credit for the ongoing tax benefits associated with the mismatch between its cash flows and the IRS treatment thereof, as explained in greater detail below. We conservatively assume only 5% growth in acquisition volume and minimal operating leverage

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