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Why Weaker Earnings Still Have PRA Group Investors Happy

By Dan Caplinger - May 10, 2018 at 8:22AM

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The debt collector made some big strides during the quarter.

Like many businesses, debt collection is a cyclical industry, and as a major player in that industry, PRA Group (PRAA 0.35%) is subject to the ups and downs of the economy. During good times, there aren't as many nonperforming loans for PRA Group to collect on. Only when times get tough do default rates move higher, spurring many creditors to turn their collections over to PRA.

Coming into Wednesday's first-quarter financial report, PRA Group investors were prepared for declines in earnings and almost no sales growth. The debt collection specialist took the expected bottom-line hit, but rising revenue was encouraging for those looking for signs of strength from the company.

PRA Group logo.

Image source: PRA Group.

PRA Group starts 2018 strong

PRA Group's first-quarter results were mixed. The company did well on the revenue front, seeing its top line rise 8% to $223.2 million. Net income attributable to PRA shareholders dropped more than 55% to $21.1 million, but much of that was due to a one-time gain in the year-ago quarter, and earnings per share of $0.47 were still far better than the consensus forecast among investors for just $0.35 per share.

Fundamentally, PRA Group's performance was sound. Cash collections jumped 12% to reach a new record of $426.6 million globally. The company saw solid gains in all four of its primary focus areas, with the biggest growth coming from the European core market, which enjoyed 20% cash collection growth. The tiny European insolvency unit saw even better percentage gains approaching 40%. Activity in the Americas saw less dramatic increases, but core Americas cash collection still climbed nearly $20 million, and an 11% rise in Americas insolvency cash collections rounded out a high-growth quarter. Much of the gains in Europe came from the weak U.S. dollar compared to the euro, but even adjusting for currency fluctuations, growth was still significant across the Atlantic.

PRA Group continued to make key portfolio acquisitions. The company spent just $168.3 million on finance receivables, down by 50% from what it invested three months ago. The vast majority of new assets came in the core Americas market. Remaining receivable collections rose to $5.78 billion.

CEO Kevin Stevenson pointed to the progress PRA Group has made. "Hiring and operational improvements, together with record portfolio purchases in 2017," Stevenson said, "continue to drive increases in cash collections." The CEO noted that hiring new collectors worked exactly as expected, making PRA more efficient and effective in collecting on its debts.

What's ahead for PRA Group?

PRA thinks there's more room for improvement. The company is still hiring and now has almost 3,100 full-time U.S.-based debt collection professionals, up by 10% in just the past three months. That signals PRA's expectations that the market for debt collection activity should increase in the future, and the company will be ready when conditions warrant ramping up and capturing a greater share of the market.

Those following PRA Group are already counting on the company to turn more of its debt collection opportunities into profit. Shareholders are largely willing to give PRA the rest of 2018 to get in position to connect its sales growth to net income, but in 2019, they expect the company to see earnings growth in the range of 30% or more. Those are high expectations, but they're doable if PRA stays on target and gets some help on the macroeconomic front.

PRA Group investors didn't react immediately to the report, and the stock was mostly unchanged in after-hours trading following the announcement. Even with a drop in earnings from year-ago levels, bullish shareholders think PRA could be on the cusp of a big expansion in the months and years to come.

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