Analyst Sees Solid Quarter for PRA, Uncertain 2008 for Debt Buyers

An analyst that covers Portfolio Recovery Associates (Nasdaq: PRAA) for Kaufman Bros. expects the debt purchaser and collector to report solid earnings when it announces Thursday its fourth quarter and full-year 2007 results. But she also told insideARM that the broader accounts receivable management industry faces a 2008 that is clouded by uncertainty.

Audrey Snell estimates the Norfolk, Va.-based company will report revenues of around $54.6 million for the quarter with earnings of $0.75 per share. Snell noted in a research report that the estimate is in-line with other Wall Street estimates.

PRA's fourth quarter results would be relatively flat compared with the third quarter of 2007, Snell said, as the company faces an erosion of collector productivity, specifically in its flagship Norfolk office, a problem that management identified and promised to focus on during its last earnings conference call in late October.

Snell currently has a “Hold” rating on PRA’s shares, that she calls a “true Hold rating.” “This is not a backdoor ‘Sell’ rating,” she told insideARM. “We really want to wait and see what will happen in the market over 2008.”

Snell said that she’s worried about the small group of publicly-traded debt buyers and collectors – Asset Acceptance, Asta Funding, Encore Capital, and PRA – from the standpoint of stressed consumers. “I’m concerned about the ability of the debt purchasers to collect in a timely manner,” she said. Snell also covers Asta.

“We know that collections are slowing – Asta said as much in its earnings conference call last week (“Asta Reports Strong First Quarter, Sees Challenging Collection Ahead,” Feb. 12) – it’s just a matter of how much and how it will hit earnings,” she said.

Snell noted that there is some silver lining for the industry. “Purchasing activity is very good, with debt portfolio prices very attractive,” she said. Snell estimates that credit card portfolios are priced about 10 percent lower than last year’s average. Also, if the companies experience too much in the way of consumer payment stagnation, they could shift their liquidation strategies to focus more on, for example, reselling portfolios.

Consumers could also get a boost in the first two quarters of 2008. Snell notes that the first quarter is typically a strong quarter in the industry due to tax refunds. The economic stimulus package recently passed by Congress could also put money into consumers’ hands in the second quarter, possibly leading to an increase in debt payments.