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Perfection in Recession? - PRAA

February 04, 2008 | About:
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;

2002: $0.94

2003: $1.32

2004: $1.73

2005: $2.28

2006: $2.77

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.

About the author:

Dr. Paul Price

Visit Dr. Paul Price's Website

Rating: 2.7/5 (19 votes)


Danielw - 6 years ago

I've been wanting to say something along the lines that if you slap a bull market multiple on almost any random company in the middle of a bear market almost everything will appear to be undervalued. It seems, however, that you're proving my point.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
I don't understand what you're trying to say in the above comment. Please explain.
Danielw - 6 years ago

Quite simply, your method of slapping a bull market multiple on stocks in a bear market seems to be lacking in that it wouldn't actually seem to screen out many companies.

It also has a serious flaw in that the hoped-for upside is based on expected past multiples returning and future earnings coming in as expected. These are related in some ways to the true value of a company but don't really tell us much.

Similarly, it's dangerous to estimate downside in a stock based on past lows. Again, those lows were based on something--or presumably were--but the value of a business is what investors would do well to look at. And they'll get a much better view of that value by looking at, ahem, the actual business (rather than other people's opinion of it over time--on the upside or the downside).

Just some thoughts. And nothing against the ideas you've come up with. Cheers,
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
When yearly or multi-year lows are hit it is usually at times of great market stress [such as recently, post- 9/11 terrorist attacks or after other extreme events]. Thus, I give great weight to those lows as they generally reflect periods of excessive pessimism.

When those same lows are referenced against current fundamentals that are now MUCH BETTER than when those old lows took place, I give even more weight to those levels as becoming 'floor' values for the shares in question.

If you've been reading my postings carefully you'll see I never assume bull-market P/Es for my projections. I use normalized or even below-median P/Es to reach my target price points.

By definition, medians indicate levels that are exceeded 50% the time. Thus goal prices less than, or equal to median valuations are very likely to be lower [more conservative] than actual future peaks in share prices.

When differences in estimates are out there I use the low-end to make my goal prices.
Danielw - 6 years ago

Using lows as a screening tool for possibly undervalued stocks is good. Equating previous lows with potential downside or downside risk is not good and can be very bad.

Using multi-year lows doesn't change the above fact. And again using lows or PE multiples from 2003-2007, which was a bull market, can paint a misleading picture.

Using median PE multiples for any period is, like all of the above, misleading because the company is no doubt at a much different point in their growth cycle.

Whether that is good or bad for the company in question is not known by me, but I think that any investor looking at getting in this name would again benefit from looking at the actual company and its growth prospects--rather than looking at how other people have viewed the same over a bullish period of time and taking an average multiple from that.

Finally, as for taking analyst earnings estimates, low or high you are sort of assuming they know what in the world they are doing. That's possibly correct but again a look at the actual business itself would be much, much better.

I am young but it's amazing to me how many people in the investing world have no clue what they're doing. Many of these analysts are just sort of updating what was written before, or looking at what their peers are doing and trying to keep in line with that. Very little work going on.

For all I know this stock could work out brilliantly and it could be very cheap. But I don't think we can objectively call it cheap without actually looking at the company. The analysts (with regards to earnings) and the market (with regards to multiples) don't always get it right. Are job is to find out when they mess up. And the fact that the present is different from the past does not count as an error. To figure this problem out we actually have to look at the company itself...for starters.

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago

You act on the presumption that the years 2003 - 2007 were homogenous 'bull market years'. Nothing could be furthur from the truth. Intra-year mood swings can see both euphoria and extreme pessimism [e.g. early 2007 verus late February- early March 2007 and Jan. - March of 2003 verus late year 2003]. The moods were 180 degrees different at different times during the SAME YEAR.

Yearly or multi-year lows are almost always hit during the 'bear market' phases making those prices very relavent when looking at how low particular share price might go in the future when the mood is again bleak.

You stated that you are young. Take it from someone with 30 years of experience that past data is the best thing you have to use for your investment decisions.

You seems to feel I don't look a the 'businesses' in assessing their stock prospects. Sales, cash flow, earnings, dividend and book value changes over time all reflect fully the changing fortunes of the business in question. What could be more relevent that those metrics? When you measure P/E, P/CF, P/BV and Dividend yields versus historical levels at previous low points [read: best prior year buying opportunties]you have a good idea of what the same shares looked like when they were about to go way up.

Buying stocks that have the same valuation characteristics that they had at their best buying levels in the past usually leads to excellent future performance.

Correct me if I'm wrong, but I don't think I've seen you put out any stock recommendations with your thought process outlined in detail. Please share with us uninformed people what we should be buying or selling and why you think so.

Danielw - 6 years ago

I'm not acting under any presumptions. Stocks may swing of course, but swings for companies within an overall bull market are very often going to be very different from swings within a bear market.

Again, previous lows on a stock price don't really give you any important information about what risk you are taking, or potential downside. I submit again that you are looking in the wrong places, if protecting your downside is your concern.

The above is Value Investing 101. The intrinsic value of a stock is based on facts about the company itself (and not people's day to day opinions of the same, as reflected in the stock price).

Conversely, the investment risk one takes in a stock is based on facts about the Company like the strength of their balance sheet, cash and securities on hand, assets that can be sold--and so on. Like value, it should most emphatically not be estimated based on previous stock prices.

You stated that you have 30 years of experience. In the investing world, you can have 200 years but what matters most are the choices you make, the actual data you use, and the subsequent trading of a stock.

I agree that past data is useful. I just think you continue to use "data" and assumptions that are very weak: your estimates of risk and value (based on past multiples or stock prices) especially.

As for my own recommendations, I don't know how to find the one's I've posted here. I talked about a stock I own on the Single Best Idea post though and have a blog that discusses my holdings and my reasons for owning them too.

For what it's worth, I own SRA Corporation, EPM Petroleum, Imperial Metals, PotashCorp, Brookfield Asset Management and Henderson Land Development. All have extremely strong management teams, and ownership. And I bought all at a seemingly significant discount to fair value.

Personally, I think I'm pretty decent at taking in a bunch of data, and acting on that data by making buys or sells despite what the Market as a whole is doing. But I'm pretty poor at spitting that data out.

Regardless, you're sort of changing the topic of discussion right? And to one that is specifically irrelevant for assessing whether future downside can or should be estimated based on past lows for a stock. If you'd like to defend that, I'd be interested in listening. If you'd like to pick apart one of my ideas, please head to the blog. I am always keen on improving my skills...

Danielw - 6 years ago

Wow. I've also been thinking that I'm wasting my time here. I guess the poor ratings confirm that other people think the same. So be it. Message taken. I'll leave the posters to wallow through cute titles and poor analysis without my comments added.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago


The only thing put out there are a few selected tidbits from news stories or from third party sources. This seems to violate [by ommission] everything he says is needed to 'properly value a company'.

BAM: Getting Good Deals Done

"It has been said that it's almost a once in a lifetime opportunity that assets of this quality, being primarily the Australian assets, come up for sale,'' said Colonial's Snowden. "The only way a full acquisition could work is if a much larger, better capitalized group is able to take over the business.''

That's from a recent Bloomberg article on the liquidation sale that may soon take place for some or all of the shopping malls owned by the Australian-based Centro Properties Group. Brookfield Asset Management is of course one of the rumored bidders, and I wouldn't mind too much at all if they could cherry-pick some of the high-quality assets.

In a major turn of events for two of the city’s most prominent office towers, Brookfield Asset Management Inc. has reportedly agreed to buy out its minority

partner, Rreef Real Estate, after the latter group offered its share of 53 and 75 State St. to the investment sales market. One estimate puts the deal in the $600 million range. Collectively, the Financial District towers encompass 1.9 million sf of class A office space.

That's from a similarly recent article and, like the first, reminds me of a great quote recently highlighted in one of the always-excellent Third Avenue Value reports. From the perspective of an investor who keeps his head on straight when all around him people are losing theirs, it is certainly true:

"It's in bad times when good deals are struck." --Andre Oscar Wallenburg

BAM has recently raised about three-quarters of a billion dollars total from their remarkably successful Stelco investment, the sale of their interest in the Bovespa, and their refinancing of One Liberty Plaza in New York. In this environment, there are now and should continue to be many places to put that money (along with any other amounts raised) to good work.

Some of the money that should have gone or did go into Berkshire because Warren Buffett would find better uses for his cash might end up finding its way to the Canadian version. At least that is the way I'm betting.

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago

NO share prices, NO valaution data, NO facts. Just Hype on share he wants to promote.

Saturday, January 5, 2008

Ag (and other) Picks for 2008

I've been getting some emails asking for my 2008 picks in the agriculture sector, and figured I'd go ahead and make a post on it after writing out two already. The following isn't really a "post" per se--more like one of my responses--but, hey, this isn't exactly a paying job either.

My main holding in the sector continues to be a bunch of LEAPS on PotashCorp but you're right, HEM is my pick in the sector right now--if I was adding money to it. Despite a very nice run of late, I think it continues to be cheap because many people investing in the sector are investing in only the big names or indexes like COW and MOO.

Those ag companies outside of the indexes--like BrasilAgro, Sinofert Holdings, and Hemisphere GPS--are cheaper, though they've gotten a whole lot more expensive of late. The smart move (I think) is to find the investable one's that will one day be included, and make money off of the "arbitrage" when they finally are--which is a big reason why I was bullish on HEM and continue to be (aside from its currently cheap valuation, especially relative to the sector).

I think that the agriculture story is going to run further in 2008, but with one exception--which I'll probably talk about next week--I am looking to other areas to invest new money. In the middle of a recession or at the height of fears of one, I'd like to pick up more base metals exposure (via SRZ), some Japanese property (via the common stock of Daibiru), and possibly LEAPS on a good company like Coach. Been holding the trigger for a long time on the last two, but was trigger happy with the first (though thankfully I have ammunition to last me a while).

My portfolio hasn't changed much at all lately, with the exception of moving some cash into GLD yesterday (which I don't look at as an investment so much as a placeholder while I wait for something productive to do with that money). Hemisphere GPS, Evolution Petroleum, Strategic Resources, Brookfield Asset Management, PotashCorp, and Henderson Land Development are all there is--but it's a quality line-up in my opinion. Anyway, hope you have a healthy and prosperous New Year...

Posted by Daniel at 3:25 AM

Labels: 012, 297, 8806, agro3, bam, coh

Danielw - 6 years ago

Lol. Those aren't write-ups or recommendations, simply discussions of some stocks I own or like to own. The difference is important to keep in mind.

Good tactic, though: attack a non-relevant position of your opponent and hope the argument moves towards that, rather than defend your concept of (and methodology of looking at both) risk and upside--which is obviously hard.

Anyway, no hard feelings. Honestly. I'm always eager to learn, and don't have any problem admitting I'm wrong on anything. In fact, I'll go ahead and say it: if those are judged as write-ups, they're horrible ones.

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
I couldn't find any detailed recommendations for ANYTHING on your blog. Just generalized comments with no facts to back them up [as seen in the above blog entries].
Danielw - 6 years ago

The post from my blog you pasted about BAM is definitely not a write-up. Nor is it making generalized comments. It, like the majority of blog posts, links to two news articles and then attempts to put them into context.

The articles mentioned possible purchases of BAM and I put them into the appropriate context by noting specific amounts of money raised which can and most likely will be used to make such investments. This is the kind of discussion I would like to hear from someone else about a stock I owned or was looking to buy. I don't mind you not liking it, but if you are going to judge it, you should judge it based on its purpose.

Finally, as I said before, the quality (or lack thereof) of anything I write is irrelevant to the issue of whether it's proper to look at downside risk in a stock by looking at past stock prices. You may feel better about not having to admit you are wrong, something which can't happen if you never confront the issue, but at the end of the day you'll have learned nothing. Ask yourself who loses in such a situation.


Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
To all those who say I don't pick any winners:

PRAA closed out at $47.63 today and touched $50.50 intraday.

Not surpirsingly,its P/E is almost exactly back to its 10-year median.

Please check back on all my picks 1 - 2 years from when they were posted. I believe they'll have done very well as a group.
Gmimura - 6 years ago
Does anybody know why there is such a big short interest on this stock (it's been going on for 2 years while earnings and revenues have doubled?).

Batbeer2 premium member - 6 years ago
Basically, looking at past p/e's and basing a target price on that is a technical analysis.

Using earnings estimates to enhance this analysis is a good thing and IMO takes away some of the risk. Still reading the financial statements and getting to know the business as well as you can will give you most confidence in buying the right stocks.

To answer your question...

Earnings between 2002 and 2007

85 220 Mil


7 241 Mil

Total Equity

119 235 Mil

Debt to equity ratio = 0.7 !!

If they make a mistake this company will go out with a bang. I guess there are people out there expecting a mistake and selling short.

Don't get me wrong, Stockdocx has a winner and we can only congratulate him with that. Still this is exactly why P/E doesn't tell the whole story. Daniels point if i may say so.

Happy investing to all and good luck to the PRAA CEO !
Kfh227 premium member - 6 years ago
>> Basically, looking at past p/e's and basing a target price on that is a technical analysis.

I have to agree. maybe mot technical analysis but I wouldn't call it valuation. Basing PE on future growth expectations does make sense though.
Gmimura - 6 years ago
What do you guys think of ASFI. I sold my PRAA and started buying ASFI here at 12.75..

Less than 3.5 x earnings..-- recently 3.52 fully diluted. Same industry, same monster short interest. ASFI has been growing retained earnings, tangible book value to 18 bucks per share... I don't think it is as well run as PRAA but the valuation difference is too big to ignore... comments?

25% insider held by Stern family. 28.8% short interest.
Batbeer2 premium member - 6 years ago
I can't put a price on it. But i'll give you my thoughts:

They have been doing this for some time and must be finding a lot of oportunities now. Just like PRAA if they trip... they drop like a stone and nobody will be inclined to do anything about it. Any stock can drop to 0 but this one will come down hard if it does.

- Debt to equity is high looks (even) more like a bank than PRAA. This is trading like a small and risky bank !

- Earnings have been growing faster than debt for the last ten years. So they are doing something right.

- Insider trading looks good. The last insider sell was at $38 For the rest some buys and some exercises. People only buy for one reason !

- If you find anything you don't like about management, be afraid. They need to be very smart and VERY trustworthy in this business.

- Some good funds are buying at the moment. One of them is Royce. I read in another post that Royce knows alot about small caps.

I would buy if i could find 100 of them and i had enough money to buy in equal amounts.

Hey Stockdocx ! we tend to look at things differently how about your thoughts on this one ?

Gmimura - 6 years ago
Thanks for that...

1) Average debt to equity ratios for all banks, brokers and diversified financials is 5x or more... ASFI is 1.2 x... PRAA is .7 AACC is 1.5 None of these guys look like a subprime mortgage Reit, S&L or bank.

2) One measure of accounting conservatism for the industry is ratio of revenue as a percentage of collections-- for ASFI it is 59%... much lower than everybody else... PRAA is much higher 83%...

3) PRAA discloses every possible detail of its portfolios and its cash collections have always exceeded their collection curves... ASFI doesn't disclose any portfolio details. Impairments for these guys has been very minimal.

4) Not sure I am arguing one is better than another... they are both good buys. At the end of this month, if earnings come through, can't we assume that we have seen the worst environment for collections? Or does everybody think it will only get MUCH WORSE.. we have had a lot of stimulus.. certainly from the fed..

5) Why is there such a huge industry short of AACC, ECPG, PRAA and ASFI? Isn't this a growing industry based on all the hiring going on? I keep reading articles in NYT and Business week about how this industry is staffing up. Yet all of these stocks are at 52 week lows or recently off them. For a big short, isn't this pushing their luck and bad trade placement?

Gmimura - 6 years ago
Guys, help me out but this is starting to really bug me....

If you look at Earnings per share versus stock price of ASFI and PRAA... you will see some really odd divergence. I know that this is quite simplistic.

But my point is that there aren't many stocks that are making a lot more money today than they were 5 years ago that have not gone up in price commensurately. My screens keep showing these as the TOP 2!!!

Ticker ----- Earnings ----------------------------------Stock Price

---------------5 yrs ago-----Today------%----------- 5 yrs ago-------Today






My example of GS, XOM and GE is obviously a silly comparison. I don't include starting multiples etc and they are completely different businesses etc...

But it isn't that easy to find companies with earnings per diluted share that increased dramatically with stock prices that haven't moved!!!! Plus, these earnings have been growing consistently over the years indicating that the underlying business that they are in is growing. And their tangible book values foot out to the earnings increase... No M&A games here. No off balance sheet items. No Footnotes. These guys are too small and too transparent.

If earnings come through this quarter, and the next, doesn't that vindicate their ability to collect in good times and bad... enough to continue the 20%+ ROE?

Seriously, they have already come though the second half of 2007 which is something NO financial company has done very well so far except for GS.

Also banks keep increasing their credit lines to these guys... isn't that a show of faith during a time when credit is shrinking?

Funny, companies like IDT (a Fairholme Favorite) are getting into the debt collection business has well. SLM bought Arrow Financial... A lot of these guys have been around for decades!

So why is everybody so bearish on these stocks? Why the big industry shorts 1/3 of float? They aren't in danger of going bust.

I am very bewildered. Shorts are suppose to be SUPER smart and super diligent -- Chanos and Ackmen are very analytical.

Either this is the biggest NO Brainer for value investors everywhere or I am missing some impending legislation or a meteor or whatever.

Comments appreciated..
Gmimura - 6 years ago
By the way both of these stocks are hard to borrow and have been on the Nasdaq Threshhold list. It isn't possible to short them without paying 10% per annum...

Batbeer2 premium member - 6 years ago
A bargain is not a bargain if it remains a bargain ;-)

I look at the business and i don't think PRAA is less risky than BAC. Please let me explain why i look at PRAA and ASFI and compare them to a bank ....

Banks cook their books by putting a value on (investment)assets. They come out later and tell us the assets are worthless due to things outside their control. This has allways been the case. It's just extra clear now.

PRAA and ASFI also cook their books by putting a value on the debt they bought. Now what happens if they come out and say that due to circumstances outside their control.... This risk becomes greater as they take on more debt.

With both, you are buying the integrity of management.

- I couldn't say PRAAs management is better than BACs.

- I can say BAC is cheaper and i can also say

- BAC has a safety net (they will be bailed out).

It's all a bit qualitative but you probably know the numbers better than i ever will. If a lot of people think my way, PRAA and ASFI will not be going places. If you are looking for risk adjusted value why not look for a bank that is steadily incresing earnings and is trading at single digit p/e. I like ING but i don't own shares at this time. It may be a foreign bank but some people see BAC as a foreign bank ;)

If i realy HAD to short a company i would short ASFI. It's not very transparant and this is usually not a sign of great management integrity.

Happy investing to all!

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