UPDATE: Portfolio Recovery Associates (PRAA)

If you read the previous blog on PRAA, then you'll be happy if you took my advice to excercise patience.

It's getting more of a discount built in now.
The stock is now trading at $45.37, compared to my fair value in the range of $55 - $58. That's about 15% discount. I usually want at least a 25% discount, so we'll see what offers Mr Market places before us in the next few days.

THE COFFEE MAY BE EXPENSIVE..
but the stock is looking cheap.

I'm talking about Starbucks (SBUX). It's been on my watch list for a while now and I like the current valuation. I had a buy around price of $22-$25 and it's currently trading around $26.

While I believe the stock is a buy at around $20-$25, I am factoring in the following:
-- Domestic growth has slowed
-- In some local regions where growth can be had, it's facing stiffer competition
-- A slowing economy makes Starbucks a luxury for many
-- Deviation from core business and the accompanying risks.

All the same, it's a well run company with huge growth potentials, especially in foreign markets. I believe management runs the company conservatively with the greater good of employees in mind. The company continue to maintain a sales growth north of 20% and have enough leverage to implement a price increase.

The current P.E of 31 while higher than the industry average is less than the company's average P.E which has been in the 40s. ROI, ROE remains high and debt is no issue.

I believe at a price of around $25, it's a great company to hold for the next few years.

Great Investment Opportunity??
Cadbury Schweppes (CSG) just announced that due to the difficulty of finding a buyer, they are planning to spin off their Americas Beverages division.

These spin-offs usually provide great investment opportunities for investors who can take the time to do the research and follow the story. Watch out for this.

Americas Beverages division include products like Dr Pepper, Snapple and Mott among others in its portfolio. It comprises about 80% of CSG revenues and profit in the U.S.
Most shareholders of CSG including institutional investors will probably sell off the Americas Beverages stock after the transaction is completed leading to a huge bargain for those who buy then going forward. Be on the look out and I will try to follow it on this blog.

The transaction should be done sometime around 2nd quarter of 2008.

What's It Worth To You?
PRAA

In these turbulent times of foreclosures, increasing debt defaults, high consumer credit, it's important to ask the question: who benefits?

The answer has led me to a company called Portfolio Recovery Associates (PRAA).
PRAA business model is simple and straightforward. The company buys defaulted credit ebts from lenders for just a few pennies on the dollar and tries to recover some of the debt. As long as PRAA can collect a few pennies more than it paid for the debt, the company makes a solid profit. Their record for doing just that has been phenomenal.

This is a well run company. Its leadership under CEO Steven Fredrickson and CFO Kevin Stevenson have demonstrated an ability to be disciplined in their transactions and have run things efficiently since its founding. That discipline has helped PRAA avoid the most dangerous mistake the company can make: buying too much debt without proper regard for the price paid.

The companies accounting has also been very conservative. Given this history as well as the current situation in the credit market, PRAA was worth a good look.

From the Motley Fool:

Portfolio Recovery made massive debt acquisitions -- the second-largest quarterly purchases in the company's history. In the first half of 2007, PR purchased nearly $102.3 million in debt; that's nearly as much as the $105.8 million it bought in all of 2006. Management indicated that its most recent purchases come with higher collection expectations than those from the past 12 to 18 months. Higher purchases are very good news, though perhaps not too surprising, since PR's "suppliers" -- big credit card companies like Capital One (NYSE: COF), Bank of America (NYSE: BAC), and Citigroup (NYSE: C) -- have all been charging off debt at greater rates this year than last.
Also, the growth of Portfolio Recovery's three wholly owned fee-for-service businesses has been outstanding, even though one of the three (Anchor Receivables Management, which collects cash on behalf of third parties) still faces headwinds.
Finally, the steadiness of PR's profit margins is a happy sign, especially given how well the fee-for-service businesses have done. These subsidiaries are inherently lower-margin, so you'd expect them to squeeze overall margins as they grow. The healthy margins are also good news, in light of productivity problems at Portfolio Recovery's newest call center.

I calculated the fair value of PRAA stock to be between $55 to $58 making it a fair buy right now, but not a great buy at discount. Looking at the P.E, we realize it is selling at a little discount compared to it's historical price. It currently has a P.E of 17 compared to the average of 21. Free cash flow is great and growing at a good clip also.
You can be patient on this stock and I recommend patience when it comes to investing, but don't wait around for it. If other better investments show up, take it. PRAA may not get really cheap anytime soon because of favorable conditions in the news.

If you are ok with just simply growing with the company going forward without too much worry for a risk cushion, it's as good a time as any to buy. Just do your homework.

What's It Worth to You?

It's been a while but recent events have brought me back to this blog and I'm starting with a new, boring series: What's it Worth to You?

For the next few weeks, I will screen for good companies and then run through the valuation to see what it's actually worth and at what price we should buy for the long term.

What to keep in mind:

1. Don't lose money: That means that in buying these companies, we want to limit our downside risk by making sure they are actually great companies and will perform well going forward, not just bargains for bargains sake.

2. It's possible to be wrong: Yes, our valuations may be off as hard as we try. I may not factor in certain possibilities. Also, since this is not going to be like a wall street research, we intend to keep it simple. This point brings us back to the "don't lose money" thing. We will look for huge discounts to the actual value since we may be wrong.

3. Take advantage of special situations: Life's got a lot to do with getting ready for great chances when they come around and taking them. We'll discuss this more with time.

So hopefully this will be fun and years down the line, we would have made some good money from this and learned a lot about life and investing.
The companies will run the gamut, big, small, foreign , domestic.

Enjoy.