Finding Value in Debt … Collection: Portfolio Recovery Associates, Inc. (PRAA), Encore Capital Group, Inc. (ECPG)

In contrast to Encore, Portfolio Recovery Associates, Inc. (NASDAQ: PRAA) focuses more on the bankruptcy market segment, which accounted for almost half of its portfolio acquisitions during 2012. While bankruptcy-related receivables have a higher purchase price compared to defaulted consumer debt, they require less manpower through the resolution process, leading to a higher profit margin. As a result, Portfolio Recovery generated a 36.5% operating margin in 2012 versus a 27.7% operating margin for Encore.

Portfolio Recovery also enjoyed strong overall results in FY2012, with increases in revenues and operating income of 29.2% and 21.4%, respectively, compared to the prior year. Despite a slight decline in its operating profitability, the company benefited from strong productivity from its workforce, as well as better collection results from its portfolio. While prices for receivables have been rising across all asset segments, Portfolio Recovery Associates, Inc. (NASDAQ: PRAA) is still finding value in certain areas and the company expects further growth to its portfolio in 2013.

The bottom line

Tracking down deadbeat debtors can be a potentially time-consuming and costly process for small companies. However, the large firms have the resources to scientifically calculate the odds of repayment and leverage their expertise with the legal system. Given continued growth in consumer credit and the predictability of human behavior, the industry should have ample growth opportunities in the future. Encore and Portfolio Recovery have shown an ability to successfully manage the industry’s risks and they deserve a spot on investors’ watchlist.

The article Finding Value in Debt … Collection originally appeared on Fool.com and is written by Robert Hanley.

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