Collecting unpaid debts is a big business, and although there are many small players in the industry, some relatively large companies have sought to build scale in order to be as efficient as possible. PRA Group (PRAA +2.69%) has become a leader in debt collection, but what's especially surprising is that even in a strong economy featuring low unemployment rates and steadily rising wage growth, the company has started to see some favorable trends in its collection activity.
Coming into Tuesday's second-quarter financial report, PRA Group investors had high hopes that the company would see accelerating levels of business activity. PRA's results were even better than many had expected, and they left reason for shareholders to think that even more gains could lie ahead as the business cycle turns.
Image source: PRA Group.
PRA Group keeps hitting records
PRA Group's second-quarter results showed the strength of the industry. Revenue was higher by 9% to $221.5 million, accelerating from first-quarter levels even though it was slightly less than the 10% growth that those following the stock were expecting to see. Net income attributable to PRA Group soared 68% to $19.6 million, and that produced earnings of $0.43 per share, matching the ambitious consensus forecast from investors.
Global cash collections are the key metric that PRA Group seeks to increase, and the company succeeded in pushing the figure up 9% to $406.6 million. Gains were reasonably balanced across PRA Group's two primary geographical areas and between its core and insolvency groups. The Americas core business showed the greatest absolute gains, climbing to $233.8 million, but European core performance rose faster on a percentage basis. Worldwide collections related to PRA's insolvency practice were also higher by almost 9%. Favorable currency movements lifted overall European results, but the impact wasn't all that large.
The strategy that PRA Group has followed over the years has been to continually invest in new portfolio assets, and that activity continued during the quarter. PRA spent $221.4 million in purchasing finance receivables, boosting its exposure to its Americas core business while devoting relatively little capital to its other business units. The company estimates that it has $5.73 billion left in remaining collections, up more than $400 million from year-ago levels.
CEO Kevin Stevenson was happy with PRA Group's results. "The second quarter was characterized by the same themes we have experienced since late last year -- increased cash collections, increased supply, and appropriate staffing in the U.S., and a focus on discipline and operations in Europe," Stevenson said. The CEO pointed to PRA's record investment in Americas core, and he believes that rising supply trends will keep the business moving forward.
Can PRA Group keep growing?
In particular, PRA sees the environment changing, and it's preparing for a new cyclical upturn. As Stevenson noted, "We have also seen an increase in the number of accounts qualifying for our legal collections channel in the U.S." That creates an opportunity for the company, although it could also bring higher expenses in the short run as PRA Group invests in its legal channel more extensively.
One thing PRA Group shareholders will need to keep an eye on, though, is what happens in 2019. The reduction in income tax rates had a huge impact on PRA Group's bottom line, resulting in a drop in income tax expense of nearly $7 million. Pretax profit for PRA was up just 3.5%, though, and the big question is whether that's where profit growth is likely to revert once tax reform stops having such large positive year-over-year effects.
For now, PRA Group investors seemed less than comfortable with the results, and the stock fell 4% just after the market opened on Wednesday morning following the Tuesday night announcement. However, if the U.S. economy starts to show signs of topping out, then the resulting increase in debt collection activity could be the start of a new leg higher for PRA's business prospects.
