On July 29, 2010, Portfolio Recovery Associates Inc. (PRAA) reported its second-quarter income from continuing operations of $19.5 million or $1.14 per share, surpassing the Zacks Consensus Estimate of 92 cents. The strong earnings were primarily driven by higher-than-expected top-line growth attributable to continuous improvisation of core call center and legal collections. Moreover, investments in bankruptcy portfolios continued to mature, which in turn helped surmount the weak economy and the allowance charge of $6.3 million.
Results in the reported quarter increased favorably by 67% from the year-ago earnings of $11.7 million or 76 cents per share.
The amortization rate in the quarter included a $6.3 million net allowance charge (approximately $3.9 million after tax or 23 cents per share), against pools of finance receivables accounts. Portfolio Recovery also witnessed continuing non-cash equity-based compensation expense of $1.2 million (approximately $0.7 million after tax, or 4 cents per share).
Business Update
Portfolio Recovery’s total revenue increased 31% to $93.0 million from $71.1 million in the year-ago period. This was driven by the growth of 34.4% of cash receipts in the reported quarter from $107.5 million in the prior-year quarter. Portfolio Recovery utilized 40.1% of its cash collections to reduce the carrying basis of its owned debt portfolios against 40.3% in the year ago quarter.
Cash collections jumped 42% year-over-year to $128 million from $90.5 million in the year-ago period. Call center and other collections posted a 9% increase, external legal collections gained 14%, internal legal collections grew 167% and purchased bankruptcy collections rose 123%, compared to the prior year quarter.
Balance Sheet
During the reported quarter, Portfolio Recovery spent $86.8 million in portfolio acquisitions to purchase $1.7 billion of face-value debt. This debt was acquired in 78 portfolios from 11 different sellers to further improve collector productivity and to initiate steps to strengthen the fee businesses.
Portfolio Recovery exited the quarter with net repayments of $6.8 million on its line of credit, leaving outstanding borrowings at $289.5 million. As of June 30, 2010, Portfolio Recovery had $75.5 million remaining under its line of available borrowing.
At the end of June 30, 2010, Portfolio Recovery’s cash balances came in at $18.3 million as against $20.3 million at the end of the prior year quarter.
As of June 30, 2010, Portfolio recovery had total assets of $915.0 million and shareholders’ equity of $448.7 million.
Our Take
Overall, Portfolio Recovery results have been showing great improvement with higher revenues offsetting the seasonal weakness in consumer collections. The company also benefits from long-term investments made over the past several years. We expect these investments to continue as they would allow the company to overcome downward pressure of the economy resulting in high unemployment and limited availability of consumer credit.
Portfolio Recovery is also expected to benefit from Claims Compensation Bureau, LLC (CCB), whose 62% stake was acquired in March 2010. CCB has expanded even beyond securities class action settlements and payment processing of anti-trust class action settlements. This is expected to be accretive to the earnings of Portfolio Recovery in the medium to long term. On the other hand, CCB is also expected to gain from Portfolio Recovery’s already well-positioned business portfolio.
Additionally, the short-term Zacks #2 Rank (Buy) rating for Portfolio Recovery indicates a likelihood of upward bias on the shares over the near term.
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