Portfolio Recovery Beats Estimates

Portfolio Recovery Associates Inc. ( PRAA - Analyst Report ) reported second-quarter 2012 income from continuing operations of $1.87 per share, surpassing the Zacks Consensus Estimate of $1.64. The results also exceeded the prior-year earnings of $1.48.

In the quarter under review, net income came in at $32.0 million, compared with $25.6 million recorded in the second quarter of 2011. Earnings were primarily driven by strong top-line growth attributable to continuous improvement in cash collections.

Portfolio Recovery’s total revenue in the reported quarter was $147.9 million, showing a 29% upside from $114.8 million in the year-ago period. Revenue also surpassed the Zacks Consensus Estimate of $141 million.

The boost in revenue was driven by growth of 30% in cash receipts to $247.7 million from $190.8 million in the prior-year quarter. Portfolio Recovery deployed 42.0% of its cash collections to reduce its owned debt portfolios, up from 41.8% in the year-ago quarter.

Cash collections jumped 32% year over year to $232.4 million from $176.3 million in the year-ago period. Call center and other collections posted a 14% increase, external legal collections gained 52%, internal legal collections surged 58% and purchased bankruptcy collections improved 35%, compared with the prior-year quarter.

However, Portfolio Recovery’s revenue from its fee-for-service businesses was $15.3 million, up from 14.5 million in the year-ago quarter. The increase was mainly due to the revenues from the UK business, which were partially offset by a decline in the fee-for-service revenue from the U.S.

Operating margin declined 280 basis points year over year to 36.9% in the quarter under review. The decline was attributable to higher legal collection expenses.

Balance Sheet and Capital Structure

As of June 30, 2012, cash and cash equivalents increased to $42.6 million from $26.7 million recorded at the end of 2011.

Portfolio Recovery had $292 million outstanding under its line of credit as of June 30, 2012. The remaining borrowing availability under the line was $166.6 million as of June 30, 2012.

Portfolio recovery exited the quarter with total assets of $1.17 billion and shareholders’ equity of $633.4 million.

Share Repurchase Update

Portfolio Recovery has a share repurchase authorization of $100 million. During the second quarter of 2012, the company repurchased 0.30 million shares at an average price of $68.62 under the program. As of June 30, 2012, the company had remaining authorization of $77 million under the share repurchase program.

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.

Even the performance of the fee-for-service business showed improvement in the quarter, after posting weak results in the past few quarters. The balance sheet also strengthened with higher cash balance and increased shareholders’ equity.

Portfolio Recovery’s competitor Encore Capital Group Inc. ( ECPG - Snapshot Report ) will report its second-quarter financial results after the market closes on August 2, 2012.

We retain our Neutral recommendation on Portfolio Recovery Associates. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.