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Portfolio Recovery Posts Strong 4Q

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Portfolio Recovery Associates Inc. (PRAA - Free Report) reported fourth-quarter 2012 income from continuing operations of $2.10 per share, surpassing the Zacks Consensus Estimate of $2.00. The results also exceeded the prior-year earnings of $1.54.

In the quarter under review, the company’s net income came in at $35.8 million, up 35% from $26.6 million recorded in the fourth quarter of 2011. Earnings were primarily driven by a surge in revenues, which was attributable to the continuous improvement in income from finance receivables and fees.

Portfolio Recovery’s total revenue in the reported quarter was $154.3 million, soaring 31% from $118.1 million in the year-ago period.  Revenue also exceeded the Zacks Consensus Estimate of $148 million.

The boost in revenue was driven by an improvement of 25% in cash receipts to $245.4 million from $195.7 million in the prior-year quarter. Cash collections from finance receivables also jumped 27% year over year to $229.2 million from $180.3 million.

Call center and other collections posted a 19% increase, external legal collections gained 58%, internal legal collections surged 36% and purchased bankruptcy collections expanded 21%, compared with the prior-year quarter.

Additionally, Portfolio Recovery’s revenue from its finance receivables income was $138.1 million, up 34% from $102.7 million in the year-ago quarter. Fee income increased to $16.2 million from $15.3 million, mainly due to the fee income from the UK business, which more than offset the decrease in fee income from the US fee-based businesses.

Operating expenses surged 31% year over year to $94.3 million, while operating income also increased 31% to $60.0 million. As a result, operating margin remained at the year-ago quarter level of 38.9% in the quarter under review.

Full-Year 2012 Highlights

For full-year 2012, Portfolio Recovery reported operating income per share of $7.39, which surpassed the Zacks Consensus Estimate of $7.29 and prior-year earnings of $5.85.

Portfolio Recovery’s revenue amounted to $592.8 million in 2012, showing a year-over-year increase from $458.9 million. The company’s full-year net income came in at $126.6 million, up 26% from $100.8 million recorded in 2011.

Balance Sheet and Capital Structure

As of Dec 31, 2012, Portfolio Recovery’s cash and cash equivalents increased to $32.7 million from $26.7 million recorded at the end of 2011.

The company had $127.0 million outstanding under its line of credit as of Dec 31, 2012. The remaining borrowing availability under the line was $273.0 million as of Dec 31, 2012.

Portfolio Recovery exited 2012 with total assets of $1.29 billion, increasing from $1.07 billion as of Dec 31, 2011. Shareholders’ equity stood at $708.4 million as of 2012-end, compared with $595.5 million as of Dec 31, 2011.

Our Take

Portfolio Recovery’s bottom-line results have shown steady improvement over the past few quarters. Strong cash collections drove revenues upward, although operating margin remained constant due to higher operating expenses, which offset the increase in operating income. Income from both business lines improved.

After posting weak results in many quarters, fee income has been trending upward since the second quarter of 2012. Higher cash balance and increased shareholders’ equity strengthened the balance sheet as well. Overall, the fourth-quarter results outperformed expectations.

Another business services outsourcing company – Vistaprint N.V. reported net income of $23.0 million or 66 cents per share in the second quarter of fiscal 2013 (ended Dec 31, 2012) compared with $31.7 million or 82 cents in the year-earlier quarter. Although earnings decreased on a year-over-year basis, it was well above the Zacks Consensus Estimate of 49 cents.

Portfolio Recovery carries a Zacks Rank #3 (Hold). Other business services outsourcing companies worth considering are Barrett Business Services Inc. (BBSI - Free Report) and Broadridge Financial Solutions, Inc. (BR - Free Report) . Both these companies carry a Zacks Rank #2 (Buy).

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