Things have been pretty boring for shareholders of Motley Fool Hidden Gems pick Portfolio Recovery Associates
A few days after PRA's earnings announcement, Asset Acceptance Capital
Investors had good reason to be concerned. Companies in the business of collecting bad debt can find themselves in a heap of trouble if they pay too much for that debt, or buy debt that's harder to collect than they initially thought. However, PRA has consistently refused to overpay, which has helped the company achieve fine operational performance to date.
Today brought the first sign that PRA's fortunes may be looking up. The company announced that it's putting all of its operating earnings to work buying debt. It has renegotiated a new $75 million bank credit line, earmarked to further increase its debt portfolio before the end of the year. Investors love the news, pushing the stock up by more than 8% in Monday's midday trading.
While the company's outlook on the debt market back in late October wasn't as negative as AAC's, today's announcement is an about-face from PRA's earlier expectations. The October change in personal bankruptcy laws apparently created a surge of last-minute bankruptcy filings from people who wanted to be subject to the more lenient terms of the old law. While this may have caused some debt to become at least temporarily less collectible, it also created a large new supply of bankrupt debt at attractive prices.
Rather than making you wait for the disclosure at the end of this article, I'll tell you now that I own shares in Portfolio Recovery Associates and have considered buying shares in Asset Acceptance Capital. I also view today's announcement by PRA as a positive, though I must admit I didn't expect such a pleasant surprise so soon after becoming a shareholder. I simply found the company's long-term opportunities too compelling to pass up, especially at last October's $36-per-share price.
The shares' current $42 price tag is still below my own valuation estimate, but a substantial portion of the margin of safety is now gone. Of course, today's announcement could point to more robust growth than I expected, but I'm not ready to make any adjustments in my valuation estimate just yet. I'll be waiting for more signs of improvement. Today's good news suggests they might just be on the way.
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Nathan Parmelee owns shares in Portfolio Recovery Associates but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
