Portfolio Recovery Associates Positioned for AAA Performance
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Market Leader in Consumer Debt Purchase and Collection
Portfolio Recovery Associates (NASDAQ: PRAA), a financial and business service company, is engaged in the purchase, collection, and management of defaulted consumer receivables. A market leader in the consumer debt purchase and collection industry, Portfolio Recovery Assets ("PRA") has a longstanding culture of compliance and collaborative engagement with its customers for creating realistic, affordable repayment plans.
In addition to debt-collection, the company provides fee-based services such as vehicle location and collateral recovery for auto lenders, governments, and law enforcement, and both audit and debt recovery for local government entities and class action claims recovery.
Aided by the recession and record defaults in the housing market, the company’s revenue almost quadrupled from $149M in 2005 to over $550M in 2012. PRA had a trailing 12-month return on assets of over 11% and return on equity of more than 18%, aided by a trailing 12-month profit margin of 21% and an operating margin of 36%.
The key to the company’s success is better execution due to an inherent price discipline and the exceptional ability to control operational costs. The company's continued ability to do so will become even more vital as the recently launched Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission try to clean up shoddy industry practices. This will create opportunities for Portfolio Recovery Associates and its competitors to substantially grow by acquisition as they buy the assets of other, less efficiently run firms.
Key Asset Purchase Set to Increase Significant Stream of Revenues
For example, at the end of 2012, PRA announced a $115.3 million purchase of specific assets from National Capital Management, LLC; specifically, secured and unsecured consumer bankruptcy accounts and operating assets associated with the underwriting and collection of secured bankruptcy claims. The bankruptcy business has become a significant contributor to the company’s bottom line and should make up for the decrease in debt recovery business due to the leveling off of defaults in the housing market and the recession.
Discounted Cash Flow, Intrinsic Value and Current Market Price
While the discounted valuation cash flow (DCF) method is best used for privately-held companies, it can also be used as an acid test for publicly traded stocks. It projects a series of future cash flows, EBITDA or earnings and then discounts them for the time value of money, typically using the company's own weighted average cost of capital over a period of five to ten years. The sum of all the future discounted flows is the company's present value.
Doing this basic fundamental valuation is straightforward. By analyzing a company's fundamentals, you determine an intrinsic value, or what the stock is really worth, as opposed to its value determined by the market. If the intrinsic value is more than the current market price, this translates into a potential equity purchase. The 5-Year Price vs. Intrinsic Value graph shown below suggests that the markets may be undervaluing PRA by a substantial margin ($103 price per share vs. a fair value of $272 per share; assuming a growth rate of 22% and a discount rate of 12%).
Key Competitor and Additional Competition
Encore Capital Group (NASDAQ: ECPG), one of PRA's main competitors, is considered to have one of the more efficient operations in this very fragmented industry. The company had a trailing 12-month return on assets of over 10% and return on equity of 19%, in addition to a trailing 12-month profit margin of 12% and an operating margin of 28%. It is forecast to earn $3.69 a share in 2013 on revenue of $630 million, up 19% and 13%, respectively, from this year. Encore is also in the enviable position of cherry picking assets and or companies to both grow and acquire additional income channels.
Asta Funding (NASDAQ: ASFI), another competitor, had a trailing 12-month return on assets of 5% and return on equity of 5.9%, in addition to a trailing 12-month profit margin of over 22% and an operating margin of 43%. The company's strong balance sheet puts them in an excellent position for funding potential investment opportunities without the immediate need for external financing.
Shakedowns, Shakeouts and Opportunities
While the number of debt recovery shops have proliferated since 2008, a regulatory crackdown will create opportunities for the more efficient businesses to acquire partial or whole assets from rogue companies that cannot survive the scrutiny. Portfolio Recovery Associates, Inc. is in a position to benefit from this exercise by the potential opportunity to increase revenues. This should reflect nicely on the company's future market price.
mjwcopywriter has no position in any stocks mentioned. The Motley Fool recommends Portfolio Recovery Associates. The Motley Fool owns shares of Portfolio Recovery Associates. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!