hondo928 (99.68)

Catch the Knife: A PRAA analysis

November 26, 2007 – Comments (4) | RELATED TICKERS: PRAA , AACC

I recently stated in a blog post that I was going to try and find high-rated stocks that have been underperforming, my first official analysis after ELOS is going to be Portfolio Recovery Associates or PRAA.  This stock price has plummeted since July 20, of this year and is currently sitting around 2 year lows, Motley Fool recently published an article I can't get the link thing but go to Yahoo Finance it's called Black Friday Bargains.  Yet almost 2600 Fools have outperform picks on the company while just 52 say underperform. And of 77 Superstars (People ranked 99 and above) only BigHiegs has that beneficial underperform call (wcwhiner is losing his recent underperform call, the only other red thumb).  So with such positive thoughts on this loan collector why the slump in stock prices? 

Well for me the first thing I had to ask when looking into PRAA was what does this company do?  I mean I know they collect loans but that varies and with that is the amount of risk and the marketplace according to fool.com “Portfolio Recovery (PRA) buys defaulted consumer debt (mainly charged-off credit card accounts) for pennies on the (face value) dollar, and then collects 2.5 to 3.0 times its initial purchase price over the next seven years.”  Ok so now that we know the type of loans, not mortgages, I’m willing to give this company a chance.  In actuality compared to 4 star competitor Asset Acceptance Capital (AACC) the stock price  has held up well. 

Now the half-million dollar question….why is this stock been getting killed?  When searching near the bottom or for value you need to understand why the stock is depressed before you can determine if Mr. Market is wrong today.  My first guess would be this these companies began to see shares decline with the sub-prime mess, with charts seeing dips at similar times as TMA and CFC, while not as drastic investors probably rightfully assumed that many Americans would be going Chapter 11, and getting exempt from their debt, thus PRAA would have to fight with everyone else to get the little those people have. However because many people are going Chapter 13 instead, this problem may be less than initially assumed, which is good news…sorta.  To make matters worse two analyst downgrades in this time period probably aren’t helping the stock.  HoldsideAnalyst makes some good points in his pitch, with some good follow up, but basically the blood is on the street for debt right now and prices are low, PRAA shouldn’t be making too much money till later, right now they are loading up which might hurt EPS numbers, maybe that’s why September’s missed which probably caused further stock decline.    Finally some people don’t seem to think they are honest search PRAA on google and right after the company website you’ll find hundreds of people claiming they are being frauded by this company.  Now they might be deadbeats not paying their bills and just whining about it rather than owning up to their issues, my guess is PRAA is far from making friends in their industry, but their might be some truth to these accusations.   

 Stock price depression and valuation seem to go hand in hand, in July many thought this stock was overvalued, so they shorted and that 30% profit is nice, but now P/E is 12.8, PEG is .9, price to book is 2.61, and price to sales is 2.75, no longer would I consider PRAA an overvalued stock, in fact seems like it might be a little oversold based upon those ratios. 

If we compare the margins to that of AACC they are considerably better, which I would consider a good sign if you want to decide between the two.  Unfortunatly because the “Specialized Finance” industry varies so greatly comparing it to peers is hard. I like the balance sheet with not an overwhelming amount of debt compared to cash and it too trumps that off AACC. 

Cash flow isn’t growing incredibly, but it's steady at 5%, however that could all change over the next few years making this an interesting section of the analysis, as they spend money to buy up those crappy loans and we go into recession, they may not be collecting to much.  Debt to cash flow ratio however is very strong at this point, in time so far I see no reason why PRAA should be declining further.  

I currently have PRAA as an outperform call, and have all of 2 points from it, as it hasn’t fallen as far as the rest of the market, if you look at a list of technical indicators for PRAA over the past few months it’s a blood bath of bearish signal, after bearish signal ranging from GAPs, crossing below moving averages and the CCI, but as of late their might be some hope the MACD has moved across the signal line, and both  are pointing slightly upwards, momentum is above 0, and both long and short-term KST oscillators are above the trend line.  Tentatively the technicals look good PRAA, I’m not much of a chartist, but this would allow me to feel more secure in buying some.  Now here is the best news on the technical side in my opinion short interest is 6.9 million shares, while the average volume is only 223,000.  If you see where I’m going with this the days to cover is 30!  If you don’t know what that means basically if your short you want that number to be lower, personally I like about 5, a higher number means that a short squeeze could cause higher price increases for a longer-time as the shorts have to cover, to make the margin calls, this is good news in the event this happens and your long, you can jump off and make a nice profit.  That 30 cents for a $45 December call option might not be to bad after all, if their is a squeeze you might see it strike.(I don’t do options I’m just throwing the idea in there)

 OK so where’s the earnings? Beating estimates is a pretty good way to propel your stock upwards however the last two times PRAA, has reported they met, and most recently missed earnings, but as other fools have pointed out they are clearly in a buying cycle, they are acquiring debt with such a large supply and collecting it.  If you’re a long-term investor than this downturn in collection which has led to a lower stock price is actually somewhat good for you.   

Surely you have read somewhere that insiders buying shares is good news, so I went for a look through EDGAR and the first few didn’t really tell me much a few 1,000 bought for nothing here and there, then a $13 purchase.  But then I came across the 11/6/2007 filing of Mr. Craig Grube, Executive Vice President, he purchased about 5000 shares for about $40 a share, hey guess what you can get it for $39.11 right now.  But then the next day we have Mr. Judith Disposing of 1,700 shares on the open market.  But he did pick up 2000 at $13 a share, so he increased his position and got to pocket some cash, I can’t really blame the guy, maybe he wanted a new deck or something.  Sure the CEO dropped 10k shares back in July at $63 a pop but he was the one who added the 10k at 13 a share a few days ago.  So I like to see the buying from the execs, particularly that of Mr. Grube catches my eye, and thus PRAA makes me feel nice and fuzzy inside. 

 In case you’ve been unable to see my bullish outlook on PRAA through out this whole post, well here it is I would love to have me some PRAA, both long-term and short-term, maybe even throw in some LEAPs here and there, ya know if you got some extra-cash from parlaying that outrageous 24 point New England spread this weekend they barely one, or maybe you got some in Friday’s bounce, but I like Portfolio Recovery Associates, short-term I’d put a target of $45, by the time December options expire, and they seem to be able to get some discounts on their buying right now so long-term the performance is unlimited.  If I had to choose to go long-term vs. short-term I’d like the former, just because the market is rather unstable right now, and shorting financials is all the rage so the stock could be headed for further decline.   Also 5,000 shares runs about $40,000, so perhaps this a was publicity move, but 40 grand is a nice car.  I would be very surprised if a good week for the markets starting today didn’t bring a short squeeze on PRAA, combined with bullish technicals, and bargain hunters lifting this stock up 20%.  I gotta give the boys at PRAA the thumbs up with Mr. Grube leading the way.