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Portfolio Recovery Q2 Earnings Miss Estimates, Up Y/Y

Zacks Equity Research

Portfolio Recovery Associates Inc. (PRAA) reported second-quarter 2014 earnings per share of 87 cents that lagged the Zacks Consensus Estimate of 90 cents per share. However, earnings increased 2% year over year.

Higher revenues that were driven by cash collections mainly led to the year over year improvement in earnings.

Including costs and foreign exchange currency losses associated with the Aktiv Kapital acquisition of 13 cents, net income of Portfolio Recovery was 74 cents in the reported quarter, down 13% year over year.

Portfolio Recovery’s total revenue in the reported quarter came in at $197.3 million, surging nearly 7.9% from the year-ago figure. The year-over-year upside in revenues was driven by a surge in cash collections. However, revenues missed the Zacks Consensus Estimate of $201 million.

Cash collections from finance receivables rose 8% year over year to $319.3 million. Call center and other collections witnessed a 5.4% increase to $95.1 million, external legal collections grew 9.7% to $55 million, internal legal collections surged 48.5% to $45.1 million while bankruptcy court trustee collections fell 1.3% to $124.1 million.

Additionally, Portfolio Recovery’s revenues from its finance receivables income came in at $182.5 million, up 8.3% from $168.6 million in the year-ago quarter. Fee income increased 3% to $14.8.

Operating expenses rose 14.4% year over year to $120.8 million. This was mainly owing to increase in legal costs, compensation and employee services expenses, agent fees, outside fees and serves expenses as well as communications and other operating expenses. Operating income increased 3.6% to $76.5 million. As a result, operating margin declined to 38.8% from the year-ago quarter level of 40.4%.

Balance Sheet and Capital Structure

As of Jun 30, 2014, Portfolio Recovery’s cash and cash equivalents increased to $270.5 million from $162 million as of Dec 31, 2013. The company had $650 million outstanding under its line of credit as of Jun 30, 2014, higher than $184 million as of Jun 30, 2013.

As of Jun 30, 2014, Portfolio Recovery’s total assets were worth approximately $1.7 billion, rising slightly from $1.6 billion as of Dec 31, 2013. Shareholders equity was $952.3 million as of Jun 30, 2014, up from $869.5 million as of Dec 31, 2013.

Our Take

Portfolio Recovery earnings have shown steady improvement over the past few quarters and this quarter was also no exception. Strong cash collections aided revenues. However, increase in operating expenses outweighed the growth in revenues, thereby leading to margin contraction.

Portfolio Recovery successfully completed the buyouts of Aktiv Kapital, Individual Voluntary Arrangements Master Servicing Platform and other assets from Pamplona Capital Management, LLP. While the first enhances the debt portfolio of the company, the second acquisition will help it to acquire insolvencies for major retail banks and specialty finance including credit card providers in the U.K.

Portfolio Recovery also has also set a return on equity (:ROE) goal of 20% and earnings per share (EPS) growth of 15%. With benefits from the aforementioned acquisitions, we believe that the company is moving toward realizing these goals.

With regard to the debt market scenario, Portfolio Recovery is set to gain in the long term. However, in the near term, its prospects appear somewhat dampened owing to the competitive U.S. market that is limiting supply, thereby leading to high pricing.

Zacks Rank

Portfolio Recovery currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the financial services space include Euronet Worldwide Inc. (EEFT), FleetCor Technologies, Inc. (FLT) and Apollo Residential Mortgage, Inc. (AMTG). All three stocks have a Zacks Rank #2 (Buy).

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