Collecting debt is a tough business, but if you're successful at it, it can be extremely profitable. For years, PRA Group (NASDAQ:PRAA) has made debt collection its business, and it has done a good job of finding ways to get borrowers to pay back what they owe. Still, as investors prepared to see PRA Group's fourth-quarter financial report, concerns about the pace of growth remained in the front of their minds. In its results, the company reported extremely strong growth in revenue, but its bottom line just barely inched forward. Let's take a closer look at PRA Group's quarter and whether things will look better in the coming year.
PRA Group's bottom line can't collect on its revenue growth
PRA Group managed to produce extremely strong gains in its top line figures during the quarter. Revenue climbed 36% to $250.7 million, topping the 34% sales growth that investors had expected to see. Cash collections climbed 34% to $373.4 million, and operating income grew at an even faster 40% pace. The problem, though, was that earnings rose only 2% to $0.93 per share, and even after adjusting for one-time items related to its acquisition of Aktiv Kapital, the company fell $0.15 per share short of the consensus earnings projections among most investors.
Looking more closely at the results, PRA Group's revenue gains came primarily from Europe, thanks to Aktiv Kapital now being part of its ongoing business. Core cash collections in North America rose 17%, but insolvency-related collections fell by almost 10% from the year-ago quarter. Europe, however, went from representing only about 2% of total cash collections to almost 23%, showing the geographical diversification that PRA Group's merger and acquisition activity has produced.
The biggest factor holding back PRA Group's earnings was a massive increase in its provision for income taxes. The company set aside $46.5 million for taxes during the quarter, up by nearly two-thirds as PRA Group said that a weak Norwegian currency in relation to the euro forced much of the boost. Higher taxes might be a consequence of the company's entry into the European market, even if it proves to be lucrative in the long run.
CEO Steve Frederickson was pleased with another solid quarter, saying that PRA Group "demonstrated the power of our geographical diversification with an investment performance second only to last quarter." Moreover, the company picked up more than $300 million in new investments, producing record pre-tax operating income.
Are things looking up for PRA Group?
PRA Group's strategy appears to envision continued ramp-up in its European presence. Even after the Aktiv Kapital purchase, PRA Group kept up its pace of new receivables purchases targeting the continent, spending almost half of its overall outlay on assets related to Europe.
Yet PRA Group will have to deal with a lot more debt as a result of its buyout activity. Total debt climbed to $1.48 billion as of the end of 2014, more than tripling from the $452 million it owed at the end of 2013. Nevertheless, higher leverage didn't stop PRA Group from continue to buy back its stock, with the company spending $33.2 million on repurchases at an average share price that unfortunately is $7.50 per share more than its current level.
Still, the primary driver for PRA Group's future will be the European economy. In the U.S., a rising economy has improved credit quality and made it easier for many Americans to repay debt. As Europe struggles, however, its consumers might find it harder to pay back what they owe. How well PRA Group does at squeezing borrowers will make a huge difference to its overall results in the long run.
PRA Group shares were little changed in the first hour of after-hours trading following the announcement, as investors apparently were satisfied that the earnings shortfall wasn't worth being overly concerned about. Nevertheless, if PRA Group wants to see its stock rebound from its recent slump, it will need to bring some of its impressive revenue gains down to its bottom line. Otherwise, investors might start losing confidence in the company, creating another leg down for already-suffering shareholders and raising questions about whether PRA Group's overall business model maximizes the huge opportunity it has to earn profit.
The son of PRA Group's CEO is currently employed by The Motley Fool. Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends PRA Group. The Motley Fool owns shares of PRA Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.