Portfolio Recovery Surpasses

Portfolio Recovery Associates Inc. (PRAA - Analyst Report) reported its third-quarter income from continuing operations of $18.5 million or $1.08 per share, surpassing the Zacks Consensus Estimate of $1.05. The strong earnings were primarily driven by higher-than-expected top-line growth attributable to continuous improvement in core call center and legal collections.

Moreover, investments in bankruptcy portfolios continued to mature, which in turn helped surmount the weak economy and add significant investments in the legal pipeline.

Results in the reported quarter increased favorably from the year-ago earnings of $10.1 million or 65 cents per share.

The amortization rate in the quarter included a $6.5 million net allowance charge (approximately $4.0 million after tax or 23 cents per share), against pools of finance receivables accounts. Portfolio Recovery also witnessed a non-cash, equity-based, compensation expense of $1.0 million (approximately $0.6 million after tax, or 4 cents per share).

Business Update

Portfolio Recovery’s total revenue increased 39% to $95.5 million, exceeding the Zacks Consensus Estimate of $90.0 million. The results also favorably increased from $68.6 million in the year-ago period.

This was driven by a growth of 43.4% of cash receipts in the reported quarter from $106.6 million in the prior-year quarter. Portfolio Recovery utilized 41.8% of its cash collections to reduce its owned debt portfolios against 41.2% in the year-ago quarter.

Cash collections jumped 49% year over year to $137.4 million from $92.4 million in the year-ago period. Call center and other collections posted a 6% increase, external legal collections gained 32%, internal legal collections grew 96% and purchased bankruptcy collections rose 140%, compared with the prior-year quarter.

Balance Sheet

During the reported quarter, Portfolio Recovery spent $92.5 million on portfolio acquisitions to purchase $1.38 billion of debt. This debt was acquired in 68 portfolios from 9 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 $1.0 million on its line of credit. Its current outstanding borrowings are $288.5 million. As of September 30, 2010, Portfolio Recovery had $76.5 million available under its line of credit.

At the end of September 30, 2010, Portfolio Recovery’s cash balances came in at $20.3 million as against $18.3 million at the end of the prior quarter.

As of September 30, 2010, Portfolio recovery had total assets of $947.7 million and shareholders’ equity of $468.4 million.

Our Take

Overall, Portfolio Recovery’s 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 the dull economy.

Portfolio Recovery is also expected to benefit from Claims Compensation Bureau, LLC (CCB), whose 62% stake it 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 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.

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