Portfolio Recovery's Top Line Soars

Portfolio Recovery Associates Inc.( ( PRAA - Analyst Report ) generated second-quarter income from continuing operations of $26.11 million or $1.51 per share, surpassing the Zacks Consensus Estimate of $1.42 and the prior-year earnings of $19.5 million or $1.14 per share.

Income for the reported quarter was $25.6 million or $1.48 per share after including $1.2 million or 7 cents per share on account of ongoing non-cash equity-based compensation expense and $0.69 million or 4 cents per share on account of profit from sale of real property.

The amortization rate in the quarter included a $2.3 million net allowance charge against pools of finance receivables accounts.

The strong earnings were primarily driven by higher-than-expected top-line growth attributable to continuous improvement in cash collections on portfolios of defaulted consumer debt.

Business Update

Portfolio Recovery’s total revenue increased 23% to $114.8 million, exceeding the Zacks Consensus Estimate of $113.0 million. The results also favorably increased from $93.02 million in the year-ago period.

The boost in revenue was driven by a growth of 32% in cash receipts to $190.8 million from $144.5 million in the prior-year quarter. Portfolio Recovery applied 43.1% of its cash collections to reduce its owned debt portfolios.

Cash collections jumped 37% year over year to $176.3 million from $128.4 million in the year-ago period. Call center and other collections posted a 19% increase, external legal collections gained 45%, internal legal collections grew 41% and purchased bankruptcy collections rose 56%, compared with the prior-year quarter.

Portfolio Recovery’s revenue from its fee-for-service businesses declined 10% to $14.5 million in the reported quarter.

Financial Update

During the reported quarter Portfolio Recovery spent $89.5 million on portfolio acquisitions to purchase $1.41 billion of debt. This debt was acquired in 76 portfolios from 10 different sellers to further improve collector productivity and strengthen the fee businesses.

As of June 30, 2011, cash balances were $25.5 million, down from $41.1 million as of December 31, 2010. During the reported quarter, Portfolio Recovery had net repayments of $40 million on its line of credit, leaving it with $250 million in outstanding borrowings at quarter end. The remaining borrowing availability under the line was $157.5 million as of June 30, 2011.

As on June 30, 2011, Portfolio recovery had total assets of $1.02 billion and shareholders’ equity of $542.4 million.

Our Take

Portfolio Recovery’s results have been showing great improvement over the past few quarters. The increase in cash collection during the reported quarter was the prime reason for the rise in the top-line and bottom-line. High cash receipts also enabled it to repay a substantial portion of its borrowings, thereby improving the debt-equity ratio. The company also benefited from the long-term investments made over the past several years. Overall, we expect the earnings growth to continue over the next few quarters.

Portfolio Recovery’s competitor Asta Funding Inc. ( ASFI ) is expected to announce its second quarter 2011 earnings before the market opens on August 4, 2011. Currently Portfolio Recovery carries a Zacks #2 Rank, implying a short-term Buy rating.