Investment Site Drills Down on Debt Buying Industry

Stock market technical analysis site Seeking Alpha late last week explored the debt buying industry as only it can. In an article primarily focused on Portfolio Recovery Associates, Inc. (NASDAQ: PRAA), the writer revealed some interesting details on the purchasing sector of the ARM industry.

Titled “Can Portfolio Recovery Associates Keep Up An Impressive Run?,” the article looks at PRA’s prospects for sustaining recent growth and finding new opportunities. But the piece also explores other companies in the industry.

Interestingly, the author claims to have discovered the market share of the debt buying industry among prominent purchasers, an elusive metric in such a segmented space.

According to the article, privately-held Sherman Financial accounted for 30 percent of the debt purchases in 2011, followed by Encore Capital Group (18 percent), PRA (14 percent), and Asset Acceptance Capital Corp. (8 percent).

The environment for debt buyers is also getting trickier in the aftermath of the financial crisis and subsequent consumer credit fallout:

While (debt portfolio) prices have indeed increased from 2009, forcing Portfolio Recovery to either pay more and accept lower margins or maintain price discipline and look elsewhere for revenue growth, many companies have also exited the business and there has long been an ebb-and-flow to the industry as aggressive newcomers enter, bid beyond their capabilities, and ultimately flame out. In many cases, small companies bid too much for receivables, find that they can’t hire (or keep) employees capable of collecting, and then end up selling that debt again at a lower price.

Portfolio Recovery has been at this long enough to have seen multiple cycles within the business, but investors should realize that business conditions could be getting a little more challenging. Bank card delinquencies dropped to an 18-year low in the third quarter of 2012, falling to 2.75%.

Also noted is PRA’s recent diversification and expansion, buying UK debt collector and buyer Mackenzie Hall early last year and its push into more legal and bankruptcy collections.