For being such a well-run company, shares in Hidden Gems selection Portfolio Recovery Associates (NASDAQ:PRAA) are quite volatile. This has more to do with investors' expectations and perceptions of the company than its performance, which were impressive once again.
For its third quarter, Portfolio Recovery saw its revenues climb 27.5% to $47.8 million and its diluted earnings per share increase 20.7% to $0.70. Breaking revenues down into collections and commissions (fees) shows that collections increased 22.9%, while commissions increased 72.7%. The year-over-year commissions aren't directly comparable, as last year's results contain only two months for the RDS business. That said, the growth is still impressive and diversifies the company's dependence on collections a bit. The trade-off to this diversification is lower operating margins.
During the quarter, the company purchased $1.19 billion of debt for $35.6 million. The debt came from 15 different sellers and was primarily made up of Visa, MasterCard, and private-label credit card debt. On its conference call, management commented that the overall market for purchases is one of reasonable supply, accompanied by strong demand. This is a bugaboo that has investors worried about Portfolio Recovery Associates and other debt collectors such as Encore Capital Group (NASDAQ:ECPG). It's a reasonable worry, but thus far, Portfolio Recovery Associates management has shown the discipline and knack for buying collectible debt at fair prices.
The decline in operating margins is the one down point that really stands out in the quarter. Operating margins came in at 38% for the quarter. That's a decline from last quarter's 38.5% and last year's third-quarter result of 40.25%. Some of this decline is due to the growth in the company's commission businesses, and some of it is due to growing the foundation of the business for further growth. Going forward, it's something to keep an eye on, but at this point, not something I consider overly troubling.
When looking at Portfolio Recovery, it's important to separate the volatility caused by management actions and business performance from that caused by the company being in a highly competitive industry. Thus far, dips in Portfolio Recovery's shares have come on the heels of stumbles by competitors and worries that debt pricing is getting out of hand. These fears likely won't go away anytime soon. If you have an interest in Portfolio Recovery and are waiting for the next decline, be ready to assess whether the worries are industry- or company-specific, and act accordingly.
Portfolio Recovery is a Motley Fool Hidden Gems recommendation. Find more overlooked treasures with a free 30-day trial to Tom Gardner's small-cap newsletter service.
At the time of publication, Nathan Parmelee owned shares in Portfolio Recovery Associates but had no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
