The economy has been strong for years, and the low interest rates that prevailed throughout much of the past decade encouraged consumers and businesses to take on debt in order to finance their growth. When debt goes bad, PRA Group (PRAA -0.52%) often steps in to collect, with a specialty in buying up portfolios of outstanding borrowings and trying to get borrowers to pay them back.
Coming into Thursday's third-quarter financial report, PRA Group investors were expecting that the company would be able to keep up its impressive performance from recent quarters. Instead, PRA hit a bump in the road, and higher costs kept it from posting the profit growth that shareholders had wanted to see.
Image source: PRA Group.
What held back PRA Group?
PRA Group's third-quarter results were mixed but generally fell short of what many had expected. Revenue climbed 10.5%, to $225.9 million, and that was only a bit smaller than the $228 million that most of those following the stock were looking to see. However, net income fell by about a quarter, to $12.6 million, and earnings of $0.22 per share fell well short of the consensus forecast for $0.36 per share on the bottom line.
From a fundamental standpoint, PRA Group saw some interesting crosscurrents. Global cash collections were up just 2%, to $389.3 million, with growth in the core portion of the Americas region offsetting declines on the insolvency side of the business. Business in Europe was relatively steady, although adverse currency movements played a role in keeping cash collections on the continent from posting at least modest low-single-digit percentage gains.
PRA pointed to some interesting trends. Call-center collections in the U.S. jumped 12% from year-earlier levels, while legal collections were higher by 11%. Yet outside the U.S., weakness in the Brazilian market was instrumental in keeping the overall Americas segment from seeing more substantial growth.
PRA also kept making investments toward acquiring more assets. Total purchases amounted to $237.5 million, up from about $211 million in last year's third quarter, and the highest growth came on the core Americas side of the business. A huge drop in insolvency-related acquisitions was noteworthy, although European core portfolio investments tripled from year-ago levels.
CEO Kevin Stevenson explained PRA Group's overall strategy. "Americas Core portfolio investment was the second-highest quarter ever," Stevenson said, "directly following the record we set in the second quarter of 2018. Additionally, we invested significant amounts in the U.S. legal collections channel and are ahead of our original projections." The CEO was pleased about how internal investment in boosting personnel and technology has started to pay off.
What's next for PRA Group?
PRA is optimistic about the future. As Stevenson pointed out, "It is possible we will start to see the legal cash collection portion of the more recent vintages [of portfolio investments] realized earlier than previously expected, which could have a positive impact on yields in the future." That, in turn, would validate the overall approach that PRA has taken in choosing investments.
The big question is whether PRA Group can keep its expenses in line. The legal channel has plenty of positives, but it also can result in increased collection expenses if the company isn't careful. During the quarter, legal collection costs soared by 75% from year-earlier levels. As long as what it ends up collecting exceeds what it has to spend, the legal channel should remain profitable for PRA -- but that's not something investors should take for granted.
PRA Group investors weren't pleased with the drop in profits, and the stock dropped 11% on Friday following the Thursday night announcement. In the long run, if PRA can navigate a rising-interest-rate environment and its potential negative impact on the economy, then it might well be able to prove naysayers wrong and sustain solid performance in the years to come.
