We are upgrading our recommendation on
Portfolio Recovery Associates Inc.
) to 'Outperform' from 'Neutral' based on its strong cash
collections and strategic acquisitions. Further, long-term
investments are benefiting the core portfolio, while strategic
acquisitions are accelerating the company's earnings growth.
Portfolio Recovery reported second-quarter 2012 income from
continuing operations of $1.87 per share, surpassing the Zacks
Consensus Estimate of $1.64. The results also exceeded the
prior-year earnings of $1.48.
Portfolio Recovery's bottom-line results have shown great
improvement over the past few years. Net income increased to $57.5
million in the first half of 2012 from $48.7 million in the
year-ago period. The escalation is attributable to strong
improvement in income from finance receivables, which managed to
offset the disappointing fee income revenues as well as rising
Even the performance of the fee-for-service business improved in
the second quarter of 2012, after posting weak results in the past
few quarters. The increase was mainly due to the additional
revenues from the new UK business, which were partially offset by a
decline in the fee-for-service revenues from the U.S.
Acquisitions have also played a major role in Portfolio
Recovery's development. The acquisition of Mackenzie Hall Holdings
Ltd., in January 2012, marked the company's foray into the UK. The
acquisition has boosted the company's fee income and enhanced its
competitive strength against peers, such as
Asta Funding Inc.
Encore Capital Group Inc.
However, operating expenses of Portfolio Recovery have been
escalating since 2007, leading to a decline in operating margins as
well. Even in the first half of 2012, operating expenses soared
35.5% over the year-ago period to $189 million. We expect further
growth in expenses in the upcoming years, unless an effective cost
management policy is adopted.
Portfolio Recovery currently carries a Zacks #1 Rank, implying a
short-term Strong Buy rating.
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