The debt collection business is a tough one, and specialist PRA Group (PRAA 7.75%) has had to work hard to keep itself financially healthy. With regulatory action on the rise, PRA Group has to stay ahead of changing requirements in order to collect on debts legally without raising the ire of the agencies charged with overseeing the industry.
Coming into Monday's third-quarter financial report, PRA Group investors were prepared for further declines in earnings but hoped that revenue would finally steady. Instead, the company posted a modest sales decline and further deterioration in net income. Let's take a closer look at how PRA Group did and what the company sees ahead.
Image source: PRA Group.
PRA Group continues to evolve
PRA Group's third-quarter results were disappointing to many investors. Total revenue was down more than 3% to $222 million, missing the expected $230 million by a substantial margin. GAAP net income doubled, but after adjusting for extraordinary items, adjusted net income dropped by more than a fifth to $31.7 million. That produced adjusted earnings of $0.68 per share, which missed the consensus forecast by $0.03 per share and was down sharply from the year-ago period.
Taking a closer look at PRA Group's numbers, you can see some signs of success for the company. Its estimates on the amount of remaining collections grew 9% to $5.25 billion, showing a healthy amount of future business left to work on. Return on average equity exceeded 15%, and fee-based income was once again up by roughly a quarter compared to the year-ago number. Rising figures for adjusted operating expenses weighed on profitability, although income taxes remained relatively stable.
Cash collection activity saw similar trends as those we've seen in recent quarters. Activity in the Americas was sluggish, with core collections activity remaining flat and insolvency-related collections falling by about a quarter. Yet the European market picked up, including core business gaining 12% and insolvency collections nearly doubling from year-ago levels. Even after adjusting for currency impacts, total collections were down about 1%.
PRA Group slowed down the pace of its spending on new assets. In total, the company spent $161.3 million, or less than half what it spent a year ago. Most of the purchases were in the Americas, with a big pullback in the European core market being responsible for all of the decrease in the overall number.
CEO Steve Fredrickson noted some of the moves that PRA Group has made to try to keep itself moving forward. "We continue to evolve the Company in a number of areas," Fredrickson said, "including normalizing operations in the U.S. legal collection channel despite increased documentation requirements." The CEO pointed to significant progress in Italy that is starting to pay off, and the company is still working hard to put its capital to good use.
Can PRA Group move in the right direction?
PRA Group has high hopes that its evolving business can keep finding new opportunities. The company is targeting the U.S. and Brazil as high potential return markets, and as Fredrickson says, PRA Group "maintains strong relationships with global sellers of nonperforming loans, providing them with a compliant and responsible global partner."
Still, there are some things that investors will want to keep an eye on. Net allowance charges of $13.1 million for the quarter were higher than the year-ago charges of $11.3 million. The company said that two portfolios in Italy were put on a nonaccrual basis, leading PRA Group to apply all cash collections from the portfolios toward principal amortization.
PRA Group stock didn't react much in response to the news, with shares remaining unchanged in after-hours trading following the announcement. Nevertheless, for PRA Group to stay healthy, it will need to demonstrate its ability to keep growing its debt collection business even through increasingly difficult conditions in the industry.
