Portfolio Recovery Profits Soar

Portfolio Recovery Associates Inc. (PRAA - Analyst Report) reported its fourth-quarter income from continuing operations of $20.6 million or $1.20 per share, surpassing the Zacks Consensus Estimate of $1.12 and the prior-year earnings of $12.4 million or 80 cents.

Net income in fiscal 2010 was $73.5 million or $4.35 per share, exceeding the Zacks Consensus Estimate of $4.26. Results in the reported quarter increased favorably from fiscal 2009 earnings of $44.3 million or $2.87 per share.

The strong earnings were primarily driven by higher-than-expected top-line growth attributable to continuous improvement in core call center and legal collections.

The amortization rate in the quarter included a $5.4 million net allowance charge, against pools of finance receivables accounts. Portfolio Recovery also witnessed a non-cash, equity-based, compensation expense of $1.1 million.

Business Update

Portfolio Recovery’s total revenue increased 38% to $100.8 million, exceeding the Zacks Consensus Estimate of $98.0 million. The results also favorably increased from $73.2 million in the year-ago period.

Portfolio Recovery’s total revenue in fiscal 2010 increased 33% to $372.7 million, favorably exceeding the Zacks Consensus Estimate of $370.0 million and fiscal 2009 revenue of $281.1 million.

This was driven by a growth of 42.5% in cash receipts in the reported quarter from $112.5 million in the prior-year quarter. Portfolio Recovery applied 41.3% of its cash collections to reduce its owned debt portfolios.

Cash collections jumped 52% year over year to $144.4 million from $95.3 million in the year-ago period. Call center and other collections posted a 19% increase, external legal collections gained 38%, internal legal collections grew 70% and purchased bankruptcy collections rose 110%, compared with the prior-year quarter.

Balance Sheet

During the reported quarter, Portfolio Recovery spent $85.5 million on portfolio acquisitions to purchase $1.87 billion of debt. This debt was acquired in 75 portfolios from 11 different sellers to further improve collector productivity and strengthen the fee businesses. In the reported year 2010, Portfolio Recovery purchased debt of $6.80 billion by spending $367.4 million.

The company expanded its available borrowings by entering into a new credit facility of $407.5 million, up from $365.0 million during the quarter.

Portfolio Recovery exited the quarter with net borrowings of $11.5 million on its line of credit. Its current outstanding borrowings are $300.0 million. As of December 31, 2010, Portfolio Recovery has $107.5 million borrowing available under its line of credit.

At the end of December, 2010, Portfolio Recovery’s cash balances came in at $41.1 million as against $20.3 million as on September 30.

As on December 31, 2010, Portfolio recovery had total assets of $995.9 million and shareholders’ equity of $490.5 million.

Our Take

Overall, Portfolio Recovery’s results have been showing great improvement with higher revenues. The company also benefits from long-term investments made over the past several years. We expect these investments to benefit the core portfolio and help the company overcome the economic volatility.

Besides, the new credit facility has further enhanced the company’s liquidity auguring well for Portfolio Recovery’s expansion plans for long-term growth.

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