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On Jul 12, 2013, we upgraded Portfolio Recovery Associates Inc. (PRAA - Analyst Report) to Outperform based on its efforts to diversify product portfolio, strong cash collections, and improving bottom line.

Why the Upgrade?

Portfolio Recovery reported positive earnings surprise in the last 4 quarters, with an average beat of 8.28%. We expect this Zacks Rank #1 (Strong Buy) company to outperform estimates in the second quarter of 2013 as well. Currently, the Zacks Consensus Estimate for Portfolio Recovery’s second-quarter earnings stands at $2.24 per share, up 20% over the year-ago quarter.

Portfolio Recovery’s bottom-line results have shown great improvement over the recent past.  The escalation is attributable to strong improvement in income from finance receivables and fee income, which managed to offset the rising expenses.

Moreover, Portfolio Recovery has expanded beyond its primary debt collection business into government collections, audit services and claims settlement with the acquisitions of IGS Nevada, Alatax, Broussard Partners, MuniServices, Claims Compensation Bureau and Mackenzie Hall. This diversification has helped the company in mitigating some of the stress on collections caused by the recent economic softness, while continuing to add to earnings.

Further, Portfolio Recovery’s cash collections and collector productivity (cash collections per hour paid) continue to be at record highs as efficiency improves at the company’s operating call centers and Portfolio Recovery continues to hire new collectors. Cash collections jumped 26.4% year over year to $275.5 million during the first quarter of 2013.

Other Stocks to Consider

Other stocks in the sector that are worth a look are Convergys Corporation (CVG - Snapshot Report) – Zacks Rank #1 (Strong Buy), Discover Financial Services (DFS - Analyst Report) – Zacks Rank #2 (Buy) and The Brink's Company – Zacks Rank #2 (Buy).

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