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Why this
Stock is Up +18% in the Past Month |
Published:
March 31, 2008
Shares in debt recovery specialist Portfolio Recovery Associates (Nasdaq: PRAA, $44.31) have continued to rally sharply,
gaining +18.0% over the past month. In late February, PRAA reported fourth-quarter earnings of $0.70, below analysts' consensus expectations of $0.73. However, PRAA beat expectations in other areas, reporting fourth-quarter revenues of $57.3 million against expectations of $54.7 million.
While the earnings miss looks disappointing at first glance, much of the shortfall was due to costs associated with the opening of a new call center in Jackson, Tennessee. PRAA's call centers are locations where debt collectors call consumers to try to negotiate repayments. According to management, the Jackson facility is now seeing increasing productivity and will start contributing to earnings going forward. My staff and I see this as mainly a one-off issue.
In addition, PRAA saw higher interest costs related to its purchase of new debt portfolios. While such purchases represent up-front costs, PRAA is just taking advantage of favorable conditions in its base business by purchasing portfolios of defaulted loans at bargain-basement prices.
PRAA purchases defaulted credit card debt, telephone bills and other types of debt directly from banks and lenders, often paying just a few cents for every dollar in face value of debt purchased. The company then goes out and tries to collect on those debts. If it can collect a few pennies more than it pays for the loans, PRAA makes a profit. For example, in the fourth quarter, PRAA purchased debts with a face value of $3.7 billion for just $103.8 million -- just 2.8 cents per dollar of debt purchased.
The current environment is positive for PRAA because a deteriorating economy means a larger number of charged-off and defaulted loans available for purchase. Better still, management noted that the cost of purchasing these debts is falling as the supply rises, making it easier for PRAA to turn a profit on its collections. While a weakening economy makes it tougher to collect on loans, this negative isn't fully offsetting the lower purchase costs of defaulted debts.
My staff and I also see another major competitive advantage specific to PRAA. The company is among the nation's largest debt collections firms and has one of the lowest debt burdens of any firm in the industry -- a debt-to-equity ratio of 0.71 compared to an industry average of over 1.2. These factors make it easier for PRAA to raise capital at attractive rates.
In fact, PRAA has no need to take on more debt to fund further portfolio purchases in the near term, as the company has more than $100 million available on its existing credit lines. Access to credit is absolutely crucial at this time due to the tightening credit markets. Without access to capital, a firm like PRAA cannot take full advantage of the improving environment for debt collection.
With these points in mind, PRAA remains a solid "Buy" under $50.
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Income Security
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