On Jan 20, 2015, we issued an updated research report on Portfolio Recovery Associates Inc. (PRAA). We believe the company’s focus on quality, profitability, diversified portfolios, inorganic growth and strong cash collections will help it deliver long-term growth. However, high operating expenses and financial leverage raise caution.
Portfolio Recovery is a small but significant player in a large market, with focus on quality and profitability rather than pure volume growth. A strong balance sheet further enables the company to invest in a growing portfolio of acquired accounts in North America and Europe.
Moreover, Portfolio Recovery’s bottom-line results have impressed over the past few years. Synergies from the acquisitions are expected to help bottom-line improvement in the future as well. Also the company has succeeded in outperforming its return on equity (ROE) target.
Portfolio Recovery has expanded beyond its primary debt collection business to government collections, audit services and claims settlement with the acquisitions of IGS Nevada, Alatax, Broussard Partners, MuniServices, Claims Compensation Bureau and Mackenzie Hall. The acquisition of Norway-based Aktiv Kapital in Jul 2014 granted the company access to sellers of consumer debt in 13 new markets, thereby enabling geographic expansion.
Further, the acquisition of the IVA Master Servicing Platform from Pamplona Capital Management during second-quarter 2014 is widening Portfolio Recovery’s product offering, particularly in U.K. Further, both cash collections and collector productivity (cash collections per hour paid) continue to be at record highs as efficiency improves at Portfolio Recovery’s operating call centers and the company continues to hire new collectors.
However, Portfolio Recovery faces ample challenges in acquiring defaulted consumer receivables and obtaining placement of fee-for-service receivables due to the highly fragmented and competitive nature of the accounts receivable management industry,. The intense competition continues to place the total estimated collections to purchase price ratio, which is a significant productivity metric, under pressure.
Moreover, operating expenses have been increasing considerably. Compensation and employee services, legal collection fees and costs, and other operating expense and goodwill impairment largely increased the expense during the past years.
In several of the past quarters, rising borrowing costs and increasing leverage resulted in higher interest expenses. Moreover, borrowings have increased on account of assumption of debt from Aktiv following its takeover. This has led to an increase in the financial leverage, which might make the company more vulnerable to adverse economic conditions or industry hazards.
Portfolio Recovery currently carries a Zacks Rank # 4 (Sell). Better-ranked stocks in the financial services space include CIT Group Inc. (CIT), Ladder Capital Corp (LADR) and Consumer Portfolio Services, Inc. (CPSS). All of these stocks sport a Zacks Rank #1 (Strong Buy).
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