When people default on their debt, many creditors simply give up on ever collecting their lost money. Debt-collection specialist PRA Group (PRAA -0.61%) has made a business out of helping to get recoveries from those who owe money to others, and by collecting more than they pay to obtain receivables from its customers, PRA Group has done a good job of growing its profits over time. Coming into its first-quarter financial report Wednesday afternoon, PRA Group investors hoped that the company would be able to boost its bottom line, and they largely got their wish. Let's look more closely at how PRA Group did this quarter and what's next for the collection specialist.
PRA Group squeezes more profit from its customers
Unlike what we saw last quarter, PRA Group grew its earnings at a faster pace than its sales over the course of the most recent quarter. Revenue gained a healthy 26% to $245.2 million, which was actually a bit slower than the 29% growth that those following the stock had wanted to see. Similarly, cash collections were up 28%, nearing the $400 million mark, while operating income grew 34%. Fortunately for investors, net income climbed at a 42% pace, and earnings of $1.19 per share were $0.07 better than shareholders had expected.
Supporting PRA Group's success was an extremely high return on average equity of 30%, which is particularly enviable in the current low-rate environment. The company's core collections business continued to lead the way forward for PRA Group, with gains of 18% in the key Americas segment. Meanwhile, the company's insolvency division continued to see its revenue decline, with a drop of more than a fifth since 2014's first quarter. Geographically, PRA Group continues to get about four-fifths of its revenue from the Western Hemisphere, with European business remaining stagnant this quarter.
Interestingly, a couple of individual items on the income statement stood out for PRA Group this quarter. On one hand, interest expense soared to $14.9 million, up $10 million since last year. Yet offsetting that added expense was a $6.8 million net foreign exchange gain, likely related to its European business. With many businesses seeing hits from foreign exchange, investors haven't seen many beneficial impacts like PRA Group's.
CEO Steve Frederickson celebrated PRA Group's record results. "This quarter produced the type of results we look to deliver," Frederickson said, "and we will work hard to continue this momentum through the year."
What's next for PRA Group?
The key to PRA Group's growth strategy is to invest in lucrative receivables, and the company got off to a fairly good start to the year with its investing activity in the first quarter. PRA Group spent more than $138 million in acquiring assets in its core Americas business, along with another $48 million on other assets both domestically and in Europe and $28 million in a securitized fund of Polish finance receivables. All told, that left PRA Group investing almost 40% more money this quarter than it did a year ago.
Even with its new investments, PRA Group kept its balance sheet relatively stable. Debt remained at the same $1.48 billion level the company had at the end of 2014, and PRA Group didn't make paying down debt a priority, instead spending $77.8 million to repurchase about 1.5 million shares of its own stock.
PRA Group shares didn't react strongly to the news, trading unchanged with little activity in the after-hours market following the announcement. The company has rebounded somewhat from its worst levels of the year, but the biggest challenge that PRA Group faces continues to be the prospect of rising interest rates and their impact on long-term financing costs. If PRA Group can adjust the amount it pays for receivables downward as rates rise, then it could be able to sustain its profit margins and remain a lucrative investment opportunity. If competition becomes fiercer for collection assets, though, then PRA Group could find itself without the leverage to pass through higher financing costs to sellers, and that in turn could cause PRA Group's growth to dry up in a hostile rate environment.