On Jul 7, 2014 we issued an updated research report on
Portfolio Recovery Associates Inc.
). We believe that the company's purchase of finance receivables,
its diversified portfolio, strong balance sheet and inorganic
growth strategies position it well to generate long-term growth.
The acquisition of Aktiv Kapital should also increase estimated
remaining collections (ERC), investment in new portfolios, cash
collections and improve earnings going forward. However, the
competitive accounts receivable management industry, drop in the
total estimated collections to purchase price ratio and higher
interest expenses are concerns.
Portfolio Recovery remains a small but significant player in a
large debt market, with focus on quality and profitability rather
than pure volume growth. The company deploys significant sums to
acquire debt. The strong balance sheet of the company further
enables it to invest in a growing portfolio of acquired accounts in
North America and Europe. Moreover, Portfolio Recovery's
bottom-line results have shown great improvement over the past few
years. In particular, with improvement in the fee-for-service
business, the company has been able to surpass its return on equity
Apart from its primary debt collection business, Portfolio Recovery
has expanded into government collections, audit services and claims
settlement with the acquisitions of IGS Nevada, Alatax, Broussard
Partners, MuniServices, Claims Compensation Bureau and Mackenzie
Hall. Moreover, with the closure of the pending acquisition of
Aktiv Kapital, the company's ERC is expected to outperform the
historical highs and be accretive to new cash collections, revenues
and earnings growth. Additionally, the pending acquisition of the
IVA Master Servicing Platform from Pamplona Capital Management
bodes well for long-term growth.
On the flip side, Portfolio Recovery faces considerable challenges
in acquiring defaulted consumer receivables and obtaining placement
of fee-for-service receivables, given the highly fragmented and
competitive nature of the accounts receivable management industry.
Moreover, Portfolio Recovery has been facing mounting operating
expenses since 2007. We expect a further rise in expenses in the
coming years, unless an effective cost management policy is
In several of the past quarters, rising borrowing costs and
increasing leverage have been resulting in higher interest expenses
for Portfolio Recovery. Notably, a newly acquired debt takes some
time to begin generating cash and increases interest expenses
immediately. As a result, the higher interest expense creates a
greater adverse impact on the net income.
Earlier Portfolio Recovery reported first quarter 2014 earnings
that were in line with the Zacks Consensus Estimate. Notably this
Zacks Rank #3 (Hold) stock delivered positive earnings surprises in
three of the last four quarters with an average beat of 12.01%.
Other Stocks to Consider
Better-ranked stocks in the financial services space include
American Express Company
Apollo Residential Mortgage, Inc.
SS&C Technologies Holdings, Inc.
). All three stocks have a Zacks Rank #2 (Buy).
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