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PRAA Down Despite Asset Buyout (revised)

Zacks Equity Research

Although shares of Portfolio Recovery (PRAA) moved up slightly subsequent to the company’s recent endeavor toward expanding its U.K operations, it failed to retain the momentum thereafter. On Feb 4, 2014, the company had announced the buyout of the Individual Voluntary Arrangements (:IVA) Master Servicing Platform and other operating assets related with it from Pamplona Capital Management, LLP (PCM).

The deal, to be closed before mid-2014, conforms to Portfolio Recovery’s business strengthening initiatives in the U.K., including the acquisition of U.K. consumer debt since 2012.

IVA is an alternative tool that allows individuals to evade bankruptcy through a repayment proposal that is presented to creditors by an insolvency practitioner. For quite some time now, the U.S. bankruptcy operations of ProAssurance have significantly contributed to the company’s profits.

Now with the acquisition of PCM’s assets the company counts to establish this line of business in U.K. as well, so as to accentuate overall profits going forward. The acquisition agreement also entails the recruitment of the IVA management and analytical team of PCM by Portfolio Recovery. With the help of the veteran team of PCM, Portfolio Recovery will find it convenient to cater efficiently to the U.K. consumer base.

Portfolio Recovery boasts a strong cash position that allows it to undertake inorganic growth initiates like the one mentioned above. However, the company has been witnessing mounting interest expenses due to debt issuances for quite some time.

Escalating levels of expenses coupled with intense competition make us skeptical about any near-term extraordinary performance. Thus, we caution investors regarding the short-term prospects of the stock and suggest holding it for the long run. Hence we have a Zacks Rank #3 (Hold) on Portfolio Recovery.

However, investors interested in the financial services industry may consider better-ranked stocks like American Express Co. (AXP), Financial Engines, Inc. (FNGN) and Discover Financial Services (DFS). All these stocks carry a Zacks Rank #2 (Buy).

(We are reissuing this article to correct a mistake. The original article, issued yesterday, Thursday, February 6, 2014, erroneously mentioned the company ProAssurance Corporation [PRA]. This mention has been removed.)Read the Full Research Report on PRAA
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