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Wednesday, July 24, 2013 - 13:00
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Wednesday, July 24, 2013 - 13:00

This 'Secret' Debt Collector Is Up 37% On Lower Unemployment

Wednesday, July 24, 2013 1:00 PM

There's no question the U.S. unemployment rate remains high by historical standards. But it's also undeniable that it has continued to improve, holding steady at 7.6% after the July jobs report, which showed the economy adding 195,000 jobs last month.

Improving employment trends are a big boost for the economy, fueling both consumer spending and sentiment. While that's good for every company in the S&P 500, there is one that is really cashing in on the trend.

In fact, this little-known business-services company has many of the characteristics of what we call a "Forever Stock" at StreetAuthority: high barriers to entrance, a strong balance sheet, attractive valuation and sustainable growth.

Portfolio Recovery Associates (Nasdaq: PRAA) is a $2.5 billion company that purchases, collects and manages portfolios of defaulted consumer receivables in the United States and United Kingdom. As a debt collector, Portfolio Recovery Associates has seen big gains from falling unemployment, gaining 37% this year and 65% in the past 12 months. Take a look at the big move below.

But even though Portfolio Recovery is up big in the past year, there is plenty more upside for this company, which is in position to keep growing.

One of the biggest factors fueling Portfolio Recovery's success is the company's unique business model. By focusing on higher-quality debt collection opportunities and taking a long-term approach to the collection process, Portfolio Recovery Associate's historical collection rate has averaged 2.4 times the initial purchase price for acquired debt since 1996. That dynamic was on display last year when the company purchased receivables valued at $6.2 billion for $539 million. In the first quarter, Portfolio Recovery Associates purchased $1.85 billion in defaulted debt for $215 million, creating a highly profitable opportunity with debt that has been marked at a fraction of its original value.

The company is working hard to expand its business model into international markets. In January of last year, Portfolio Recovery announced its acquisition of Mackenzie Hall, a U.K.-based consumer debt recovery specialist. The acquisition was Portfolio Recovery's first step into international markets and provides important revenue growth and geographic diversification.

Portfolio Recovery is also focused on expanding outside of its core debt collection enterprise. Its growing interest in government collections, audits and claims settlements is being driven by a flurry of small acquisitions in the past few years that includes IGS Nevada, Alatax, Broussard Partners, MuniServices and the Claims Compensation Bureau. In November 2011, Portfolio Recovery entered the private-sector auditing market with the launch of PRA Professional Services.

Portfolio Recovery also continues to achieve record cash collections and collector productivity as the company focuses on operational efficiencies and hiring new collectors. Cash collections jumped 29% in 2012 to $909 million, coming on the heels of a 33% jump in 2011 and 44% increase in 2010. That impressive growth has carried over into this year, with cash collections in the first quarter up 26% from last year.

Portfolio Recovery has used its strong earnings momentum to strengthen its financial profile, with cash and equivalents up 30% in the first quarter to $39 million. With total debt of just $390 million and operating cash flow expected to top $125 million this year, the company has plenty of room to invest in growth and increase operating leverage.

Analysts are bullish on Portfolio Recovery Associates, calling for earnings growth of 25% in 2013 and an additional 17% in 2014. In the next five years, analysts are calling for annual earnings growth of 15%.

Risks to Consider: As a smaller player in a large market, Portfolio Associates must compete with larger companies with greater financial strength and scale. Operating expenses have also been increasing with revenue growth.

Action to Take --> Portfolio Associates has been surging on the lower unemployment rate. But this is a company that investors should own in the long run for its expansion plans. But despite an impressive 37% gain this year, shares still trade with a forward price-to-earnings ratio of 15, in line with its 10-year and peer average. That adds a nice touch of value to a stock with plenty of long-term potential.

P.S. -- Stocks like Portfolio Recovery Associates are similar to a special group of securities we call "Forever Stocks." These are world-dominating companies that pay investors a fat dividend, dig a deep moat around their business to fend off competitors and buy back massive amounts of stock, boosting the value for the rest of the shares. They're solid enough stocks to buy, forget about and hold "Forever." To learn more about these stocks -- including some of their names and ticker symbols -- click here.

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.