Pennies on the Dollar

Portfolio Recovery Associates (Nasdaq: PRAA  ) is a good business in a much-maligned industry -- debt collection. Got too funky with the Visa card at Amazon.com (Nasdaq: AMZN  ) or Home Depot (NYSE: HD  ) and can't pay your bills? Consumer debt like that is bought and sold in this country, and firms such as Portfolio Recovery profit by buying low and collecting a few more pennies on the dollar than they paid. It's not a sexy biz, and it isn't well-followed. But it's profitable and -- judging by the behavior of our fellow American spendaholics -- likely to continue to grow, which is why Rex Moore made it a pick for Hidden Gems a while back.

Recent financial results show the small firm chugging along nicely even in the face of stiff competition from competitors such as Encore Capital Group (Nasdaq: ECPG  ) and NCO Group (NYSE: NCO  ) . For the third quarter, Portfolio Recovery's revenues were up 28% to $28.3 million. The bottom line was 26% growth in earnings per share, coming to $0.44 a stub. There wasn't much else for shareholders to cheer. Collections per hour for the quarter were flat, though they're up so far this year.

After last night's earnings report, investors sent the stock down about 7% today, possibly because of a slowing pace of accumulation of debt portfolios for collection. The fear is that without influxes of fresh debt, growth may slow down. That's a valid concern, but management's explanation -- that the prices just weren't right -- is equally important.

After all, there's a thin spread between the amount recovered and the amount laid out, about two cents on the dollar last quarter. You pay too much without upping your take, and suddenly profitability sinks. That's something PRAA wants to avoid at all costs, as it made clear in the conference call.

Still, the slowing pace of buying has endured more than a year, which is enough to give the Street a case of the nerves. Investors will want to keep a close eye on developments here, since the firm will need gruel, however thin, to keep moving forward.

For related Foolishness:

• PRAA meets a gumshoe.
• Check out last quarter's numbers.
• Take a peek at a few more gems worth watching.

If you're interested in strange, unheard-of small-caps, take a free trial ofThe Motley Fool Hidden Gems.

Seth Jayson has a wife who loves the idea of profiting from silly consumer behavior, which is why she owns shares of Portfolio Recovery Associates in her IRA. View his stock holdings and Fool profile here. Fool rules are here.