Do any companies benefit from growing default rates? Yes, says Paul Tracy. "As the supply of bad consumer debt swells, those in the business of buying and collecting on those loans have a more plentiful (and cheaper) pool of debt at their disposal."
The editor of StreetAuthority Market Advisor states, "Portfolio Recovery Associates (NASDAQ: PRAA) is one of the most attractive players in this particular niche. I believe that the current credit environment is actually a major benefit for the firm."
He explains, "Recovery Associates' business model is simple. The company buys defaulted credit card, auto loan and other debts from lenders. Because this debt is in default, PRAA pays just a few pennies for each dollar of debt it purchases."
Tracy continues, "As long as PRAA can collect a few pennies more than it pays for the debt, the company makes a solid profit. And PRAA has been doing just that for years."
The company, he notes, posted a 17% rise in earnings for the second quarter. Further, he points out that the company bought more than $2.5 billion in defaulted debts in the second quarter, the second-highest quarterly purchase in PRAA's history.
He observes, "One of the impediments to PRAA's growth in recent years has been the rising cost of buying up bad debts. With consumer credit quality high for most of the past four years, the supply of bad debt available for purchase fell."
But lately, he notes, the trend has reversed. Says Tracy, "Credit quality has declined somewhat and banks have been writing off more bad debts -- this represents a greater potential market for PRAA." Overall, trading at just 14 times next year's earnings estimates and growing at more than 14% annualized, the advisor rates calls the stock a "bargain" at current levels.
Each day, Steven Halpern's TheStockAdvisors.com features the latest investment ideas and market commentary from the financial newsletter community.
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