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Portfolio Recovery: A Strong Buy

Zacks Equity Research

Zacks Investment Research upgraded Portfolio Recovery Associates Inc. (PRAA) to a Zacks Rank #1 (Strong Buy) on Dec 31, 2013.

Why the Upgrade?

Portfolio Recovery witnessed upward estimate revisions on the back of solid earnings results. This full-service provider of outsourced receivables management delivered positive earnings surprises in the last 4 quarters with an average beat of 11.4%.

Over the last 60 days, most of the estimates moved north to raise the Zacks Consensus Estimate by 2.4% to $3.45 per share (representing a year-over-year improvement of 40.1%). The Zacks Consensus Estimate for 2014 also increased 1% to $3.89 (representing a year-over-year improvement of 12.9%) over the same time frame.  

The expected long term growth rate for the stock is 16%.

In the last reported quarter, Portfolio Recovery’s operating earnings per share came in at $1.02, surpassing the Zacks Consensus Estimate by 16%. The earnings also improved 57% year over year. Earnings were primarily driven by a surge in revenues, which was attributable to the continuous improvement in income from finance receivables. Renewed emphasis on the fee-for-service businesses also aided the third-quarter upside. The top line also fared well on both counts, driven by higher cash receipts.

Although operating expenses increased during the quarter, the increase in operating income countered the rise in expenses, leading to an improvement in operating margin.

Portfolio Recovery also went in for a 3:1 stock split in the third quarter to make its shares more affordable. Valuation looks attractive for Portfolio Recovery. The shares are trading at a discount to the peer group average, on forward price-to-earnings basis, with return on equity remaining 37.4% above the peer group average. Moreover, a strong financial position enables Portfolio Recovery to engage in debt repayment and share repurchases, thereby enhancing investor confidence.

Portfolio Recovery is scheduled to release its fourth-quarter 2013 results in the second week of Feb 2014. The Zacks Consensus Estimate for the quarter is pegged at 89 cents per share, translating into a year-over-year improvement of 27.7%.

Other Stocks to Consider

Other players in the financial services industry which look attractive at current levels include DFC Global Corp. (DLLR), Blackhawk Network Holdings, Inc. (HAWK) and Financial Engines, Inc. (FNGN). All these stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on PRAA
Read the Full Research Report on HAWK
Read the Full Research Report on DLLR
Read the Full Research Report on FNGN

Zacks Investment Research