Today’s new idea comes from value guru J. Royden Ward. You’ll receive your October Investment Digest issue this afternoon.
Portfolio Recovery Associates (PRAA)
from Cabot Benjamin Graham Value Investor
Portfolio Recovery Associates (PRAA) purchases, manages and collects defaulted consumer receivables from credit originators such as banks. The company either buys the receivables from credit originators or provides collection services for banks and others. Typical defaulted consumer receivables portfolios range from $1 million to $150 million in face value and contain defaulted consumer receivables with average initial individual account balances of $400 to $7,000. Receivables include credit card debt, car loans and other small loans.
The receivables collection business is fragmented into a vast number of small companies. Portfolio Recovery has been able to purchase small competitors at advantageous prices during the past 10 years. Revenues advanced 17% per year and earnings per share climbed 21% per year during the past decade.
PRAA’s growth has not diminished during the economic recovery because the recovery has been slow and loan defaults have increased. PRAA is focused on higher quality defaulted receivables and profitability. The company collects an average of 2.4 times the initial purchase price of an acquired debt, which is high in the industry. PRAA’s return on equity is an impressive 20.5%.
Revenues rose 22% during the first half of 2013 and EPS jumped 44%. I expect sales to increase 10% and EPS to rise 19% to $3.77 during the next 12 months ending 9/30/14. At 17.9 times current EPS and with a PEG ratio of 0.89, PRAA is undervalued. PRAA’s stock price will likely rise to my Min Sell Price of 82.60 within one year. The company’s balance sheet is strong.
J. Royden Ward, Cabot Benjamin Graham Value Investor, www.cabot.net, 978-745-5532, October 10, 2013