The debt collection business is in some ways countercyclical, with the need for businesses to collect unpaid debts typically growing during weak economic conditions and pulling back somewhat during good times. PRA Group (PRAA 1.00%) has seen the ups and downs of the economic cycle on its business, and it knows that it has to be ready to ramp up when available business picks up steam in the future.
Coming into Wednesday's third-quarter financial report, PRA Group investors understood that the company would once again see weaker fundamental performance from the debt collection company. PRA Group didn't pull a rabbit out of its hat to avoid that downturn, but it did give signs that it's getting ready for better times ahead. Let's take a closer look at PRA Group to see what it expects in the near future.
Image source: PRA Group.
PRA Group sees its numbers fall again
PRA Group's third-quarter results were a repeat of the downward pressure investors have seen previously. Revenue was down 9% to $201 million, but that was slightly better than the 11% decline that most investors were anticipating. Net income of $16.9 million was down by more than half from year-ago levels, and earnings of $0.34 per share represented a similarly steep percentage drop despite topping the consensus forecast for $0.28 per share on the bottom line.
Operationally, PRA Group's results weren't nearly as gloomy. Cash collections were up 3% from the year-ago period, with strength nearly across the board. The core Americas business posted minimal gains of about 1%, but European core collections jumped almost 7%. Insolvency-related collections were up slightly, with most of the strength coming from Europe, but the company did note that Americas-related insolvency collections were up for the first time in three and a half years.
PRA Group also moved to bolster its portfolio. The company spent nearly $211 million on new finance receivables during the period, up by almost $50 million from its pace a year ago. The vast majority of purchase activity centered on the Americas unit, and PRA Group has already committed to purchasing nonperforming loans in the next 12 months of up to $414 million. Overall, PRA Group estimates that it has $5.4 billion left to collect, which is up by $100 million in just the past three months.
CEO Kevin Stevenson was happy about how the company is doing. "PRA continues to deliver from an operational perspective in both Europe and the Americas," Stevenson said. The CEO pointed to greater investment in the legal channel and improved scoring systems as enhancing its ability to find higher-quality assets.
What's next for PRA Group?
PRA sees more lucrative times ahead for its business. In Stevenson's words, "We have been investing to prepare for anticipated growth, especially in the U.S., and want to make sure we are in the best position possible to help sellers globally with their nonperforming loans."
To handle that excess demand, PRA Group is looking at opening new call centers. In addition to expanding its existing sites in Virginia, the company expects that locations in Henderson, Nevada just outside Las Vegas and in Burlington, North Carolina will help lighten the load for current call centers that are at capacity. By doing so, PRA Group will be able to bring on almost 1,000 new collectors. That will be necessary in order to make the most of the assets that the company has purchased recently.
PRA Group investors didn't react immediately to the news, and the stock didn't move in after-hours trading following the announcement. Yet with the stock trading near its lowest levels in years, long-term shareholders have to hope that PRA Group will start to see signs of a cyclical upswing coming in the near future that will start to improve the company's fundamental performance.
