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Pre-Paid's Woes Take a Toll on Earnings

The legal services company musters only single-digit sales growth for the first time in recent history.

Pre-Paid Legal Services

(PPD)

has stopped reporting "record-breaking" quarters.

The struggling legal services company, hit hard by litigation of its own, mustered only single-digit sales growth for the first time in recent history. The company's second-quarter revenue inched up just 6% to $89.6 million and actually slipped from $90.3 million a quarter earlier. Net income, which climbed 18% to $10 million, is also growing much more slowly than usual and fell off from $12 million in the first quarter.

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"Quarter over quarter, everything looks terrible," said one hedge fund manager with a large short position in the stock. "But the year-over-year comparisons seem even worse."

Although Pre-Paid showed improvements in every major category, particularly cash flow and earnings per share, the company's real growth spurt appears to be over. The company posted a mere 5.5% increase in revenue from customers and weathered one of its worst-ever slumps in sales to its own associates. It also relied heavily on aggressive share buybacks to boost EPS growth -- up 36% to 57 cents a share -- to historic levels. And its strongest metric, cash flow, was helped by a sharp downturn in business that lowered commission payments to associates dramatically. That figure, helped by the biggest percentage decline in commissions for years, jumped 46% in the quarter.

"That's the first thing they point you to," said one short-seller. "But cash flow goes up in any insurance business that's not growing and running down its book of business ... Last quarter was bad. But this is twice as bad."

Pre-Paid shares slipped 1.6%, or 35 cents, to $21.85 ahead of Monday's earnings report. The stock is currently trading near the middle of its 52-week range.