We retain our Neutral recommendation on
Portfolio Recovery Associates Inc.
). Its strong top-line growth, increased cash collections and
strategic acquisitions are partly dwarfed by rising operating and
interest expenses and stiff competition.
Portfolio Recovery reported first-quarter 2012 net income of
$1.47 per share from continuing operations, which surpassed the
Zacks Consensus Estimate of $1.31 per share as well as prior-year
earnings of $1.34 per share.
Portfolio Recovery remains a significant player in the market,
with a focus on quality and profitability rather than on pure
volume growth. Since 1996, the company has collected at an average
rate of 2.43 times its initial purchase price for an acquired
The company purchased debt totaling $9.8 billion for $408.4
million last year, while $111.4 million was spent on portfolio
acquisitions to purchase $1.46 billion of debt in the first quarter
of 2012. Moreover, both cash collections and collector productivity
continue to be at record highs as productivity improved at the
company's operating call centers and it continued to recruit new
Portfolio Recovery has also expanded beyond its primary debt
collection business into government collections, audit services and
claims settlement through various acquisitions. The acquisition of
Mackenzie Hall Holdings Ltd., in January 2012, is expected to boost
the company's revenues, expand its geographic presence and increase
its competitive strength against its peers such as
Asta Funding Inc.
Encore Capital Group Inc.
However, Portfolio Recovery has experienced negative operating
leverage in the last few years due to the effects of the global
economic crisis that affected top-line growth. Further, operating
expenses have been rising, thereby leading to a drop in operating
Moreover, rising borrowing costs and increasing leverage in the
past several quarters have been pushing up interest expenses. Since
a newly-acquired debt takes time to start generating cash but
increases interest expenses immediately, this creates a huge impact
on the net income.
Currently, Portfolio Recovery carries a Zacks #3 Rank, implying
a short-term Hold rating.
ASTA FUNDING (ASFI): Free Stock Analysis Report
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