Image source: PRA Group.
PRA Group Inc. (PRAA 4.32%) released second-quarter 2016 results Monday after the market close. Though shares of the non-performing loans collection specialist initially jumped nearly 7% the following day, they've since given up those gains, and now sit little changed from the start of this week. Let's take a closer look at what drove PRA Group's second-quarter performance, and what to expect going forward.
PRA Group results: The raw numbers
|
Q2 2016 Actuals |
Q2 2015 Actuals |
Growth (YOY) | |
|---|---|---|---|
|
GAAP revenue |
$228.5 million |
$237.2 million |
(3.7%) |
|
GAAP net income |
$36.5 million |
$51.4 million |
(29%) |
|
GAAP earnings per share (diluted) |
$0.79 |
$1.06 |
(25.5%) |
Data source: PRA Group.
What happened with PRA Group this quarter?
- Results were hurt by a combination of non-cash charges and continued declines in PRA's Americas-insolvency business.
- Adjusted for the negative impact of foreign currencies, revenue would have been modestly higher, at $230 million
- On an adjusted (non-GAAP) basis, which excludes unusual items like acquisitions expenses, currency adjustments, and legal costs not associated with normal operations, net income declined 26.6% year over year, to $38.3 million. Adjusted net income per diluted share declined 23.1%, to $0.83 -- roughly in line with expectations.
- Cash collections during the quarter were $387.2 million (or $391.3 million at constant currencies), down slightly from $389.6 million in last year's second quarter.
- Achieved annualized return on equity of 16.4%, and adjusted annualized return on equity of 17.3%.
- Investments of $249.5 million, helping increase estimated remaining collections to $5.33 billion.
- Cash collection by geographic source:
- Americas-core cash collection declined 2.3% year over year, to $213.7 million.
- Americas-insolvency cash collection fell 27.1%, to $67.7 million.
- Europe-core cash collection grew 34.4% year over year, to just under $103 million.
- Europe-insolvency cash collection grew 126.8%, to $2.7 million.
- Portfolio acquisitions by geographic source:
- Americas-core grew 32.8% year over year, to $130.5 million.
- Americas-insolvency grew 76.5%, to $33.7 million.
- Europe-core declined 22.2%, to $68.8 million.
- Europe-insolvency increased nearly sixfold, to $16.4 million.
- Ended the quarter with cash and equivalents of $117.1 million, deferred tax liabilities of $276.4 million, borrowings of $1.91 billion, and equity attributable to PRA Group of $886.1 million.
- Subsequent to the end of the quarter, announced the acquisition of eGov Systems, a relatively small web-based payment portal and integrated revenue-administration company that focuses on the government sector.
What PRA Group management had to say
PRA Group CEO Steve Frederickson stated:
Our fee-based businesses in the U.S. delivered a good quarter, as both revenue and net operating income increased substantially. We are beginning to see signs that may indicate the credit cycle is turning, which could ultimately increase the supply of nonperforming loans in the U.S. In Europe, we see a strong acquisition pipeline and strong cash collections in most markets. Global sellers are increasingly looking for buying partners that offer competitive pricing, a strong compliance system, and a reputation for treating customers respectfully. Given this view, we believe PRA Group is competitively advantaged as a buyer of choice.
Looking forward
PRA Group didn't provide specific quarterly financial guidance -- and never has. But during the subsequent conference call, Frederickson elaborated that -- with the caveat that "one or even two quarters does not make a trend" -- the company is "encouraged to see the insolvency investment increase," leading to its largest buying quarter since early 2014. Further, PRA sees a strong pipeline for acquisitions in Europe, as well as early signs that indicate the credit cycle is turning, which itself should increase the supply of non-performing loans in the United States.
In the end, this was a decent -- but not great -- performance from PRA, as the company offered a potential light at the end of the tunnel as it positions itself for an eventual return to sustained growth. Until investors see more concrete signs of improvement, however, I suspect PRA Group stock will remain depressed.
