Two Stocks Poised To Profit From A Debt Collection Boom

Portfolio Recover Associates (PRAA) is the only public pure-play debt collector. With average US consumer credit card debt at all time highs at around $10,000, savings at an all time low at under 1%, mortgage rates rising, home values on the decline, and foreclosures climbing 50% over last year, I expect the US consumers to falter sooner or later. When this happens, PRAA will be in big business - the business of collecting debt for banks, credit cards, retailers, credit unions and auto loan originators.

The company has no debt, and 20% sales and earnings growth. They have a history of beating earnings by at least a penny. Around April 17th of this year, Encore Capital Group (ECPG), a competitor to PRAA, announced that a private investor group from J.C. Flowers and FPK Capital would be taking a 25% stake in ECPG. This is in addition to the 15% stake that investment firm Red Mountain Capital Partners already owned in Encore. This sent both Encore and PRAA's stocks soaring - the latter being the boat that rose from the proverbial rising tide. However, PRAA's earnings on April 25th reaffirmed their strong business and the stock soared even further.

All in all, PRAA is up around 30% from $45 back on April 17th. The huge break out came from a 10-month long base. During the same period, ECPG is up 20%. While the latter is much cheaper at 10 times earnings, it has over $200 million in debt.

My recommendation for now is to do nothing. Simply watch these stocks and wait for a better opportunity. Specifically, pounce on PRAA if it pulls back to around $52. Meanwhile if you already have a position, I recommend holding both PRAA and ECPG.

Full Disclosure: I do not own PRAA and ECPG but my position can change anytime without notice.

PRAA and ECPG 1-yr chart:

Comments

[plunsford:]

PRAA is not the only pure-play debt collector/purchaser. In addition to ECPG, take a look at AACC and ASFI.

2007 Jun 22 09:07 AM

[Cameron Wright:]

doh, beat me to it!

2007 Jun 22 09:15 AM

[Cameron Wright:]

Have you never heard of AACC or ASFI? PRAA is not the only pure play debt collector! ECPG is cheaper because it resells the debt it buys, a business model that only works in rising debt price environments. It's EPS will fall once they stop doing this.

I agree that I would not buy PRAA at this time, however.

2007 Jun 22 09:14 AM

[Faisal Laljee:]

I stand corrected. Asta Funding (ASFI), First City Financial (FCFC), Asset Acceptance (AACC) are all pure play debt collectors as well. I just want to add that although all of them have much lower market capitalization than PRAA, they have a much larger amount of debt. Therefore, their lower P/E's are misleading.

2007 Jun 22 06:39 PM