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
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
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
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