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Portfolio Recovery Associates Inc. Message Board

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  • cpa38 cpa38 May 23, 2003 12:43 PM Flag

    Overpriced?

    How do you justify using a 15% hurdle rate in an envoronment where the 30 year Treasury has a 4 handle ? You're tacking on 1100 basis points over a risk free rate. Just a tad rich, don't you think ?

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    • Admittedly 15% is a swag, but what is your long-term required rate of return for this company? Based on information the 10K/10Q, you can easily back into 17%-20% cash-on-cash IRR for purchases in the years reported (take the gross collections to date plus management's estimate of remaining collections and apply an average cost to collect, say 40%). More directly stated, management (through its disclosures) estimates that purchases will yield unlevered returns in excess of 15% - if this is the case, why would I require less than 15%...especially if mgmt has the possibility of using leverage at some point in time?

      Keep in mind, I am talking about the long-term required rate of return (afterall, I am using the formula for a perpetuity) - it would not be smart to assume current interest rates persist forever (my opinion). Historically, what has been the average equity return over the last 50 years? Moreover, do you view this growth strategy (with all of its risk) less risky than the average stock?

      I don't think 15% is too rich...of course this is just me...

 
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