Portfolio Recovery Associates, Inc. [NDQ:PRAA] Feb. 4, 2008 Price: $36.69 [10 AM]
52-week range: $27.43 - $65.66
Portfolio Recovery provides outsourcing services for receivables management. It collects, purchases, and manages portfolios of defaulted consumer receivables for other companies. They also provide collateral location services for credit issuers and collection agencies. Government entities use them for audit and debt discovery/recovery purposes as well. In short, the worse the economy, the more potential business for PRAA.
Earnings per share have grown steadily [even before the potential recession started looming]. EPS for the 6 years from 2002 - 2007 were as follows;
2007: $3.07 - 3.09 [estimate range with 4Q not yet reported]
Consensus views for 2008 hover in a range of $3.42 - $3.44/share.
Portfolio Recover Associates had almost no long-term debt [$0.1MM] as of
September 30, 2007.
Revenues, cash flow, and book value have kept pace with the growth in earnings - all three areas hit record highs in 2007 with even better numbers expected this year.
Sales surged from $55.8 MM in 2002 to an estimated $220 MM in 2007. Book Value expanded from $5.96 to over $18.40 in that same time frame.
Over the four years from 2003 - 2007 the typical P/E for PRAA was around 17X. At its peaks in each of the past five years PRAA shares traded at 19X - 26X multiples. A reversion to the median P/E of 17X 2008's estimate of $3.42 leads me to a 12-month target price of $58.14 [up $21.45 or + 58%] from the current quote.
Is $58.14 acheivable? PRAA shares hit $65.66 last summer and touched $52.98 in early 2006 when sales and earnings were well lower than today.
Risk? Excepting the total market melt-down in January 2008 these shares are near their exact lows for 2006 and 2007. In those years the to-the-penny worst trades were $38.23 and $36.28 respectively.
Portfolio Recover Associates looks like a great play on a weak economy. It should benefit from credit defaults and cash-strapped business looking to sell or farm-out their receivables. They should also pick up business from customers looking to hunt down assets for collection purposes.
PRAA is a growth stock that now trades at a non-growth multiple- just 10.7X projected 2008 EPS versus their median P/E of 17 and their peak multiples of 20X - 26X.
Disclosure: I bought shares and sold puts on PRAA today.
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