Portfolio Recovery Beats Marginally

Portfolio Recovery Associates Inc. ( ( PRAA - Analyst Report ) reported fourth-quarter income from continuing operations of $1.54 per share, which surpassed the Zacks Consensus Estimate of $1.52 and prior-year earnings of $1.20.

Operating income amounted to $26.6 million, compared with $20.6 million in the fourth quarter of 2010. Earnings were primarily driven by strong top-line growth attributable to continuous improvement in cash collections from both bankruptcy and core portfolios, partly offset by weak performance in the fee-for-service business.

Portfolio Recovery’s total revenue in the reported quarter was $118.1 million, showing a 17% upside from $100.8 million in the year-ago period.

The boost in revenue was driven by a growth of 22% in cash receipts to $195.7 million from $160.3 million in the prior-year quarter. Portfolio Recovery applied 43.0% of its cash collections to reduce its owned debt portfolios, up from 41.3% in the year-ago quarter.

Cash collections jumped 25% year over year to $180.3 million from $144.4 million in the year-ago period. Call center and other collections posted a 14% increase, external legal collections gained 23%, internal legal collections grew 37% and purchased bankruptcy collections rose 33.5%, compared with the prior-year quarter.

However, Portfolio Recovery’s revenue from its fee-for-service businesses declined 4% to $15.3 million in the reported quarter, mainly due to decrease in revenue from PRA Location Services.

Full-Year 2011 Highlights

For full-year 2011, Portfolio Recovery reported operating income per share of $5.85, which surpassed the Zacks Consensus Estimate of $5.78 and prior-year earnings of $4.35. Operating income amounted to $100.8 million, compared with $73.5 million in 2010.

Portfolio Recovery’s revenue amounted to $458.9 million in 2011, showing a year-over-year increase from $372.7 million.

Balance Sheet and Capital Structure

During the reported quarter Portfolio Recovery spent $88.9 million on portfolio acquisitions to purchase $1.21 billion of finance receivables. This debt was acquired in 83 portfolios from 12 different sellers to further improve collector productivity and strengthen the fee businesses.

During the reported quarter, Portfolio Recovery had net repayments of $40 million on its line of credit, leaving it with $220 million in outstanding borrowings at quarter end. The remaining borrowing availability under the line was $187.5 million as of December 31, 2011, while cash balances were $26.7 million, down from $41.1 million as on December 31, 2010. Portfolio recovery exited the quarter with total assets of $1.07 billion and shareholders’ equity of $595.5 million.

Our Take

Portfolio Recovery’s bottom-line results have shown great improvement over the past few quarters. Strong cash collections coupled with improved operational efficiency led to an increase in both the top and bottom lines in the reported quarter. Moreover, the strong operating performance in the quarter enabled the company to achieve a net income over the $100 million mark for the first time.

Increase in cash collection also enabled the company 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. However, the revenue of the fee-for-service business has been spiraling downward over the past few quarters and the company needs to focus on improving the segment’s performance.

Portfolio Recovery’s competitor Encore Capital Group Inc. ( ( ECPG - Snapshot Report ) reported fourth quarter operating income of 67 cents per share, beating the Zacks Consensus Estimate of 64 cents and prior-year earnings of 56 cents.

Currently, Portfolio Recovery carries a Zacks #3 Rank, implying a short-term ‘Hold’ rating. Considering the fundamentals, we maintain our long-term ‘Outperform’ recommendation on the shares.