We are downgrading our recommendation on
Portfolio Recovery Associates Inc.
) to 'Neutral' from 'Outperform' based on its rising operating
expenses and debt. Moreover, despite rising cash collections, the
total estimated collections to purchase price ratio is declining
steadily over the years.
Operating expenses has been escalating since 2007, thereby
leading to a decline in operating margins. Compensation, legal
collection fees and costs, outside fees, employee services and
communications drove much of the expense during the past few
Moreover, in the past several quarters, rising borrowing costs
and increasing leverage have been resulting in higher interest
Additionally, Portfolio Recovery faces ample challenges in
acquiring defaulted consumer receivables and obtaining placement
of fee-for-service receivables. The intense competition continues
to apply downward pressure on its total estimated collections to
purchase price ratio, which is a significant productivity metric.
The purchase price ratio declined to 189% in the first nine
months of 2012 from 332% in 1996.
Counting on the positives, Portfolio Recovery's bottom-line
results have shown great improvement over the past few years. The
escalation is attributable to strong improvement in income from
finance receivables and fee income, which managed to offset the
The performance of the fee-for-service business showed
improvement in the second and third quarters of 2012, after
posting weak results in the previous few quarters. The increase
was mainly due to the fee income from the UK business,
acquisition of Mackenzie Hall and higher revenues from PRA
Moreover, both cash collections and collector productivity
(cash collections per hour paid) continue to be at record highs
as efficiency improves at the company's operating call centers
and the company continues to hire new collectors. Cash
collections jumped 29% year over year to $679.5 million during
the first nine months of 2012.
Overall, we expect modest growth in the long term. Portfolio
Recovery carries a Zacks #3 Rank (short-term Hold). Peer
Encore Capital Group, Inc.
) also carries a Zacks #3 rank.
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PORTFOLIO RCVRY (PRAA): Free Stock Analysis
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