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Portfolio Recovery Beats Estimates

Zacks Equity Research

Portfolio Recovery Associates Inc. (PRAA) reported first-quarter 2012 income from continuing operations of $1.47 per share, which surpassed the Zacks Consensus Estimate of $1.31 as well as prior-year earnings of $1.34.

Net income amounted to $25.2 million, compared with $23.7 million in the first quarter of 2011. Earnings were primarily driven by strong top-line growth attributable to continuous improvement in cash collections. Also, the addition of Mackenzie Hall aided the performance.

Portfolio Recovery’s total revenue in the reported quarter was $140.1 million, showing a 25% upside from $111.8 million in the year-ago period.  Revenue also surpassed the Zacks Consensus Estimate of $132 million.

The boost in revenue was driven by a growth of 28% in cash receipts to $233.9 million from $182.5 million in the prior-year quarter. Portfolio Recovery applied 43.0% of its cash collections to reduce its owned debt portfolios, up from 42.4% in the year-ago quarter.

Cash collections jumped 31% year over year to $218.0 million from $166.7 million in the year-ago period. Call center and other collections posted an 18.4% increase, external legal collections gained 37.3%, internal legal collections jumped 50% and purchased bankruptcy collections rose 37.1%, compared with the prior-year quarter.

However, Portfolio Recovery’s revenue from its fee-for-service businesses was $15.9 million, flat with the year-ago quarter. The addition of Mackenzie Hall coupled with higher PRA Government Services fee income was offset by a decline in PRA Location Services and Claims Compensation Bureau fee income.

Operating margin declined 650 basis points year over year to 31.7% in the quarter under review. The decline was attributable to higher legal collection expenses.

Balance Sheet and Capital Structure

Cash and cash equivalents increased to $28.1 million from $26.7 million as of 2011 end level.

During the reported quarter, Portfolio Recovery had net borrowings of $45.0 million under its line of credit, with $265 million outstanding as of March 31, 2012. The remaining borrowing availability under the line was $142.5 million as of March 31, 2012.

Portfolio recovery exited the quarter with total assets of $1.14 billion and shareholders’ equity of $620.7 million.

Subsequent to quarter-end, the line of credit was modified to increase the credit limit by $51 million.

Share Repurchase Update

The company has a share repurchase authorization of $100 million. As of May 3, 2012, the company bought back 0.1 million shares at an average price of $68 per share.

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.

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, performance at fee-for-service business has remained weak over the past few quarters.

We retain our Neutral recommendation on Portfolio Recovery Associates.The quantitative Zacks #4 Rank (short-term Hold rating) for the company indicates slight downward pressure on the shares over the near term.

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