PRAA delivers best valuation news one can hope for. Gets destroyed.
When was the last time you heard an earnings release from a finance/investment firm end with, "We are budgeting internally for substantial revenue and earnings growth next year"? That is the equivalent of saying "throw your stupid models in the trash, analysts. We'll be blowing it out the water!" And how often does management follow up by boasting on the earnings call that the word "substantial" should be understood as being "bigger than significant"?
Well, Portfolio Recovery did that yesterday in its 3Q09 release and call. That's right, folks. "Substantial growth," on record. For those not in the know, current economic times have led every financial/investment company's management to jump towards the side of extreme-conservatism, except those who don't mind lawsuits. Or those who are very confident in their words. Phrases like these are not thrown around lightly nowadays.
But even with this great news, PRAA had plunged over 8% today, though it regained some of that ground by late afternoon. Why the big drop? Well, it missed 3Q09's earnings consensus by a good margin due to a large $8M allowance charge, for one. On that news, an analyst from Keefe Bruyette Woods downgraded PRAA, saying, "Q309 results were lower compared to our estimate primarily due to lower commission revenues than we had forecast. We are lowering our EPS estimates, price target and rating." KBF's 1Y price target came in at $35/share, compared to $49/share at market close yesterday.
Why The Face, KBF? Given the choice of 1) 3Q09 performance where a huge impairment charge was taken, and 2) managment's guidance of "substantial" growth in 2010 earnings and revenues, where a clarification of "substantial" as being "bigger than significant" was prompted when one of the analysts asked if the current 2010 revenue consensus of about $350M (compared to $275 from 4Q08 through 3Q09) was "substantial"... you chose instead to make adjustments downwards based on historic numbers?
Let's break it down a bit. This company has been operating close to 70% expense/revenue ratio for a while now. With a 2010 consensus of $350M in revenue, that would imply $105M EBIT. PRAA's interest and tax has historically chomped away 40% of EBIT, so we're looking at roughly $63M remaining for 2010. Slap on 15x P/E, which is where it's trading now (below historical, and in the current environment of scared money), and we're talking about a $61/share target at the end of 2010.
But $35 dollars in a year, KBF? Not exactly reflective of "significant" earnings or revenue growth, never mind "substantial" growth. I sure hope you guys are wrong; PRAA is a huge chunk of my investment portfolio!