Collection Agencies: Under the Gun From the New Consumer Financial Protection Bureau? Portfolio Recovery Associates (PRAA), Asset Acceptance Capital (AACC) & Encore Capital Group (ECPG)
Collection agency stocks Portfolio Recovery Associates (NASDAQ: PRAA), Asset Acceptance Capital (NASDAQ: AACC) and Encore Capital Group (NASDAQ: ECPG) have recently been strong performers but there are dark clouds on the horizon coming in the form of Consumer Financial Protection Bureau (CFPB), the 2010 Dodd-Frank financial oversight law and increased government scrutiny of the debt collection industry itself. Specifically, debt collectors and credit reporting agencies are the first industries to be targeted under the new law and by the Consumer Financial Protection Bureau (CFPB) but its worth noting that debt collectors have various business models with some trying to collect on delinquent customers for a fee while others buy debt from lenders and then try to recover what is owed. Of course, there is no shortage of consumer debt out there with the Consumer Financial Protection Bureau (CFPB) estimating that 30 million US consumers being the subject of a collection effort and $1,400 being the average amount sought but the price of debt also impacts those companies who purchases portfolios with the intention of then making a collection. Hence, should investors take a closer look at debt collection stocks Portfolio Recovery Associates (PRAA), Asset Acceptance Capital (AACC) and Encore Capital Group (ECPG) or give the industry a pass? Here is a closer look to help you decide:
Portfolio Recovery Associates (NASDAQ: PRAA) Just Surged After Reporting Earnings
Portfolio Recovery Associates purchases and manages portfolios of defaulted and bankrupt consumer receivables and provides a broad range of accounts receivable management services to lenders, service providers, governments and others. On Tuesday, Portfolio Recovery Associates surged 10.23% to $73.48 (PRAA has a 52 week trading range of $56.76 to $89.67 a share) for a market cap of $1.26 billion plus the stock is up 9.8% since the start of the year, down 14.1% over the past year and up 34.5% over the past five years. Portfolio Recovery Associates spiked after reporting 1Q2012 earnings with the highlights being a 25% year over year increase in revenues which came in at $140.1 million and a 10% increase in net income which came in at $25.5 million. It was noted that 1Q2012 results were a continuation of 2011 momentum. Otherwise, investors should be aware that Portfolio Recovery Associates has authorized a share repurchase program of up to $100 million worth of common stock.
Asset Acceptance Capital (NASDAQ: AACC) Has Also Reported Solid Earnings
Asset Acceptance Capital is a leading purchaser and collector of charged-off consumer debt that provides credit originators such as credit card issuers, consumer finance companies, retail merchants, utilities and others an efficient alternative in recovering defaulted consumer debt. For 1Q2012, Asset Acceptance Capital has reported that revenues rose 22.7% year over year to $61.8 million while net income rose from $1.1 million to $5.4 million. Asset Acceptance Capital noted that first quarter results were built on momentum achieved during 2011 but its also worth noting some of the many risks the company cited in its earnings announcement. These risks included failing to comply with government regulation, a fall in collections if there are changes in or enforcement of debt collection laws that impact the company’s ability to collect and any inability to purchase portfolios on good terms. On Tuesday, Asset Acceptance Capital rose 0.90% to $5.63 (AACC has a 52 week trading range of $2.80 to $5.69 a share) for a market cap of $172.94 million plus the stock is up 44% since the start of the year, up 12.6% over the past year and down 69.8% over the past five years.
Encore Capital Group (NASDAQ: ECPG) Will Report Earnings Later Today After the Market Closes
Encore Capital Group purchases portfolios of defaulted consumer receivables from major banks, credit unions, and utility providers and partners with individuals as they repay their obligations and work toward financial recovery. Its worth noting that Encore Capital Group is set to report earnings today after the market closes and it would be well worth hearing what the company has to say. Otherwise and for 2011, Encore Capital Group reported that gross collections rose 26% from $604.6 million in 2010 to $761.2 million while net income rose from $49.1 million to $61.0 million. However, investors should note that back in March, it was announced that West Virginia is suing two units of Encore Capital Group – claiming false affidavits in lawsuits were used (e.g robo-signed affidavits) and along with other fraudulent debt-collection practices. On Tuesday, Encore Capital Group rose 2.42% to $23.68 (ECPG has a 52 week trading range of $18.96 to $33.16 a share) for a market cap of $584.80 million plus the stock is up 11.6% since the start of the year, down 19.95% over the past year and up 93.85 over the past five years.
The Bottom Line. Collection agency stocks Portfolio Recovery Associates (PRAA), Asset Acceptance Capital (AACC) and Encore Capital Group (ECPG) all look like strong performers BUT investors will still need a stomach for risk as all three of these stocks could face strong headwinds from the government or the economy.
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