The Credit Corp Group Limited (ASX: CCP) share price jumped 5.5% higher on Thursday to close at $19.11 per share. That’s still around half of its $37.99 per share 52-week high set in mid-February.
So, what’s going on with the Aussie debt collector’s shares and why could they rocket higher in 2021?
Why the Credit Corp share price is surging higher
Credit Corp is a leading consumer debt collector. The company makes its money by purchasing debt from financiers like the major banks or other lenders for a discounted price and chasing that debt.
One key feature of businesses like Credit Corp is they often have fixed agreements with particular financiers like banks or telcos. Those agreements frequently require the collector to purchase a particular percentage of the financier’s bad debts each period.
It’s certainly not everyone’s cup of tea, but Credit Corp currently has a market capitalisation of $1.3 billion and sits within the S&P/ASX 200 Index (ASX: XJO).
The Credit Corp share price was smashed in the March bear market as investors feared a recession would mean lower debt collectability and profitability.
There were no ASX announcements yesterday to move the Credit Corp share price. However, the Federal Budget announced on Tuesday may have some important implications for Credit Corp’s business.
Strong fiscal spending is the key as the Federal Government looks to go hard and go early to stimulate the economy. Significant tax cuts and wage subsidies are good news for a company looking to collect on its debts.
Why 2021 could be a good year for Credit Corp
A strong economy should certainly be good news for Credit Corp. It would mean less financial distress and more spare money available for debt collection.
If the economy hits a really bad recession, a lot of loans can go bad quite quickly. That means a debt collector like Credit Corp could be overwhelmed with bad loans that it can’t make a good return on.
That’s why I think 2021 could hold good things for the Credit Corp share price.
Government stimulus and favourable business policies could boost employment and keep loan quality intact. That could mean steady portfolio growth with a higher chance of collection.
Foolish takeaway
The Credit Corp share price has been smashed this year. However, I think the favourable Federal Budget and recent stock momentum is good news for the company moving forward.
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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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