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

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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 theeconomy 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 wecall a "Forever Stock " at StreetAuthority: high barriers to entrance, a strongbalance 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 consumerreceivables in the United States and United Kingdom. As adebt collector, Portfolio Recovery Associates has seen biggains from fallingunemployment , gaining 37% thisyear 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 moreupside for this company, which is in position to keep growing.

One of the biggestfactors fueling Portfolio Recovery's success is the company's uniquebusiness 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 itsacquisition of Mackenzie Hall, a U.K.-based consumer debt recovery specialist. The acquisition was Portfolio Recovery's first step into international markets and provides importantrevenue growth and geographicdiversification .

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 auditingmarket with the launch of PRA Professional Services.

Portfolio Recovery also continues to achieve recordcash collections and collectorproductivity 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 strongearnings 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 operatingcash flow expected to top $125 million this year, the company has plenty of room to invest in growth and increaseoperating leverage .

Analysts arebullish on Portfolio Recovery Associates, calling forearnings 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 forwardprice-to-earnings ratio of 15, in line with its 10-year and peer average. That adds a nice touch of value to astock with plenty of long-term potential.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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