Portfolio Recovery Associates, Inc. (PRAA)

whitepapers (50.24) Submitted: 12/23/06 10:01 AM

Recs: 3 | Rec This

Portfolio Recovery Associates (PRAA)

Businesses:
Main: Debt Purchase & Liquidation
IGS: collection services, including collateral-location services for credit originators
Anchor Receivables: fee-based collections
Alatax, Inc: Management and revenue administration, audit and debt discovery/recovery services for government entities

Competitors
Asset Acceptance (AACC)*
Sherman Capital*

* Fredrickson calls the best: #01

Moat:
Management, Management, Management
In the first recommendation for PRAA, the June 2004 issue of Hidden Gems, Rex Moore’s prominent reason for recommending them is their management. He makes it clear that if CEO Steven Fredrickson ever leaves that the business would need to be re-evaluated. #02

Still Running the Place and Veterans of Debt Buying
CEO Steven Fredrickson and CFO Kevin Stevenson both left Household Recovery Services in 1996 to help found PRA and have been running the show ever since.

Stock Optioning before it was Cool
In 2003, the company was expensing stock options, the only company in the industry.

Up-Front and Conservative
“The first line of the press release mentioned 20% net income growth. Perhaps a subtlety, but reported revenue grew 27% and management could have led with that figure. They chose not to. I like that management didn't deem it necessary to simply announce the highest number they could.” #03

My side notes
This reminds me of the way that Buffett would do it. He would report the least favorable statistic and then downplay ever being able to do as good again.
Like Rex Moore, my perception of managements abilities and honest approach is what drew me to PRAA. I bought shares of PRAA primarily due to an interview #04 that I read on The Motley Fool where Bill Mann and Rex Moore interviewed CEO Steven Fredrickson. Another way that Fredrickson reminds me of Buffett is his use of probability to run his business. From the same interview, Fredrickson states that “We will generally place a bid on anything. We will give you our version of value and we will either win it or not.”

Buffett/Lynch Questions:
Barriers to Entry: Low
Moats: collection data, ability to pay reasonable prices
Will PRAA be doing this in 15 years? Yes
Is the Business Easy to Understand? Yes
Has PRAA succumbed to diworsefication? Maybe, slightly
Is this a business an idiot can run? All but purchasing of debt


Industry Difficulty:
Available Employees
PRAA has placed their call centers in areas that would avail qualified employees

Employee retention
Employees are well trained and are given incentives for results. Cash collections per hour have been constantly rising. #05

Low Barriers to Entry
The business has low barriers to entry. I’ll quote Steven Fredrickson that “anybody with a checkbook, theoretically, can become a bad debt buyer” #06 Although it might be hard to initially find sellers.

In Jim Gillies discussion board post, he explains that capital was starting to leave the space and that the pricing environment was better (although not greatly) than it was in the past 12-24 months. #07

How PRAA Differentiates themselves from Other Debt Buyers
They treat delinquent account holders as people and try to partner with them to help them pay off their debt.
This is what I think sets the prosperous debt collectors apart from the unprosperous.

They don’t resell debt
“For example, debt ending up in the hands of a 'strong-arm' company likely means the debtor associates their poor treatment not with the collection agency – but with the company they originally incurred the debt with; a company that undoubtedly (unless they've really screwed them over) would like to retain the original debtor as a customers.” #08

PRA seeks to educate debt sellers on the value of going with someone like them, but Fredrickson admitted that the current number who do so hovers around 5%. Still, PRAA will continue that battle. #09

My Notes
I’m don’t think they’ll ever get much pricing power based on their strategy to not sell debt. I think it’s probably a good internal pressure that keeps them shooting for high margins and really looking at each case instead of looking for the easy way out.

How should we compare PRAA with their competitors
“we think the real essence of a bad debt purchaser is static pool analysis” #10

Best Breakdown of PRAA I’ve seen in one place: by TMFCanuck 9/18/06 #11

Executives & Directors
Steven Fredrickson, CEO, Co-founder
Appears as though his entire career has been with debt collection. He has some history of moving around companies; not the best trait, but he’s been with PRAA for 10 years now.
Kevin Stevenson, CAO, EVP, CFO, Treasurer, Assistant Secretary Co-founder
He also spent a much of his career in debt collection. He also play a part in several bank acquisitions.
Craig Grube Executive Vice President, Acquisitions

Dividends:
PRAA has never paid a dividend as of 12/13/06

My Purchases
Jun 2, 2006, 20 shares, 49.6256
Aug 29, 2006, 25 shares, 38.7064
Aug 22, 2006, 20 shares, 41.86

#01 http://tinyurl.com/e99vw
#02 http://tinyurl.com/jcvq7
#03 http://tinyurl.com/rqdgd
#04 http://tinyurl.com/e99vw
#05 http://tinyurl.com/hnp9l
#06 http://tinyurl.com/e99vw
#07 http://tinyurl.com/rkcry
#08 http://tinyurl.com/rkcry
#09 http://tinyurl.com/rkcry
#10 http://tinyurl.com/e99vw
#11 http://tinyurl.com/rkcry

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