More Mixed Numbers From PRA Group

Every company/stock has a “hassle factor” attached, and I’m increasingly wondering if PRA Group (PRAA) is worth that hassle factor. The nature of the business of buying charged-off debt and then collecting on it makes for complicated modeling and sometimes-confusing reports, but the underlying takeaway is pretty simple – PRA Group just doesn’t seem to be doing it as profitably as they used to, and I’m not sure the operating environment is going to get all that much better.

There are certainly are some things that could go well for PRA Group. I believe recent purchase should have higher yields than the generation right before it, and the company’s efforts to scale up legal collections and build up its call centers is a “pay today, profit tomorrow” sort of trade-off. Although I can see upside into high $30’s to low $40’s if things go well, I’m increasingly concerned that PRA may not have as much room to improve margins as I previously believed and that the potential gains may not be worth the headaches involved.

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More Mixed Numbers From PRA Group

A Painful Reset As PRA Group's Performance Remains Lumpy

Even in the best of times, PRA Group (PRAA) isn't the easiest stock to own or follow. The accounting for this large collections company is challenging to learn, and the company itself can't control key performance drivers like credit quality, charged-off receivables supply, or debtors' ability to pay. On top of that, the company is in the middle of a transition period where significant investments in operating costs have yet to be recouped by improved collections across its core and insolvency portfolios.

I model PRA Group with a higher discount rate than I would normally use for a company with its track record, largely to account for the greater uncertainty in modeling. With disappointing results in the third quarter, my fair value range falls from the high-$30s to mid-$40s, down to the mid-$30s to low-$40s, but there are still multiple potentially favorable drivers in play - including increased collections efficiency, improved operating leverage, and growing receivables supply.

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A Painful Reset As PRA Group's Performance Remains Lumpy

Execution Can Drive More Upside From PRA Group

PRA Group (PRAA) has been a fairly weak performer on balance since the company last updated investors on its earnings. While the shares did stay above $40 for most of June and July, they’re more or less back where they were a quarter ago, trailing the S&P 500 but at least doing better than peer/rival Encore Capital (ECPG) over that time. Given where the company’s report was relative to analyst expectations, I’d say the expectations reset period is over, putting more pressure on management to deliver execution-driven upside.

I do believe management can do this, as the company still has a large number of relatively new employees that should become considerably more productive over the next few quarters. PRA Group is taking a more conservative stance toward Europe, which is likely a good move over the long term, and continuing to invest in business-building efforts with a long-term payoff, including more compliance and government relations work. I continue to believe that PRA shares can and should trade into the low-to-mid $40’s.

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Execution Can Drive More Upside From PRA Group

PRA Group Back On Firmer Footing

The recent past hasn't been pretty at PRA Group (PRAA), but with a couple of better quarters in hand, it seems reasonable to think that this collector of charged-off receivables is back on track. I don't believe it is realistic to expect the company to get back to the ROE levels of yesterday - the market has changed, and PRA is a much bigger share of the market now - but double-digit ROEs seem possible again, as well as a return to healthy free cash flow generation.

PRA Group is a tough company to analyze, but I expect to see improving collection efficiency metrics, as well as increasing supply, in the coming years. That supports a fair value in the high $30s to low $40s today and makes this a name worth considering on pullbacks.

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PRA Group Back On Firmer Footing

It's Early, But PRA's Fundamentals Looking Better

It's too soon to sound the "all clear" and much too soon to just assume that PRA Group (NASDAQ:PRAA) will get back to historical levels of productivity and financial success, but there is a stronger base for a positive view now than there has been in some time. PRA still has to get its staffing situation sorted out (and improve productivity), and there are still big challenges in Europe, but the supply situation is looking better, and yields could potentially improve from here.

The "but" is that the shares are up about a third from their lows in the fall. However much of that was short-covering, the reality is that the current valuation reflects what I think is a reasonable recovery scenario. There are still avenues toward higher estimates (improved collections is the key one), but I'd say a mid-$30s price is pretty fair for the time being.

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It's Early, But PRA's Fundamentals Looking Better

PRA Group Has Cyclical Rebound Potential, But Execution Must Improve

When I last wrote about PRA Group (NASDAQ:PRAA), I thought the shares of this leading debt collector where undervalued on an intrinsic/fundamental basis, but that the company had a lot of work to do to rebuild confidence and convince the Street that its issues where primarily cyclical and not structural. 

Although the shares are up more than 10% in the year since, it has not been a smooth ride – the company has seen a few sharp sell-offs after quarterly earnings reports, including the roughly 25% drop that has followed the latest second quarter report. Key metrics remain under pressure, and while there are several positive drivers that argue for better results in the future, the now-consistent inconsistency of results argues for a healthy “margin of safety” discount. PRA Group shares continue to look undervalued to me, but the company badly needs to start showing improvements where it really counts.

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PRA Group Has Cyclical Rebound Potential, But Execution Must Improve

Another Uninspiring Quarter From PRA Group

It's getting harder and harder to defend PRA Group (NASDAQ:PRAA). It's bad enough that cash collections remain weak, particularly in the Americas Core segment, but I'm troubled by the ongoing weakness in efficiency, the ongoing valuation allowances, and the divergence in performance from rival Encore (NASDAQ:ECPG). What's more, there's no concrete evidence that market conditions are going to move in a PRA-friendly direction anytime soon, and the CFPB seems likely to make life more difficult for the company.

I still see a fair value in the mid-to-high $30s as reasonable. Such a valuation assumes that performance improves meaningfully from recent levels, although not to the levels seen in 2004-2014. That said, for PRA to hit those targets, management must buy smarter, collect more effectively, and better manage expectations. None of this is guaranteed, so while the upside here remains meaningful, it comes at the cost of significant uncertainty.

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Another Uninspiring Quarter From PRA Group

Seeking Alpha: PRA Group Struggling To Adapt To A New World

A lot has changed for PRA Group (NASDAQ:PRAA) over the last few years. The company has become one of the largest collectors of defaulted credit card receivables at a time when supply has been reduced by the absence of three of the largest sellers of charged-off receivables. The company has also seen a decidedly harsher regulatory environment, as new rules and ample uncertainties have dramatically changed how lenders approach the sale of charged-off receivables and how operators like PRA Group and Encore Capital (NASDAQ:ECPG) can go about collecting them.

The net effect to PRA Group has been a marked decline in reported profits, cash flow, return on equity, and forward growth expectations. Whereas management once boldly projected 20% ROEs into the future, the market is now pricing in a long-term ROE closer to 14% and management's own projections call for a mid-single digit GAAP growth rate without a more conducive operating environment. While I think PRA Group remains undervalued, my expectations have shrunk significantly, and there are outsized execution risks both for getting the U.S. business back on track and getting real value out of the increasingly expensive-looking move into Europe. There may yet be value here, but this is another example of trying to make money the hard way.

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PRA Group Struggling To Adapt To A New World

Seeking Alpha: PRA Group Feeling A Tough Squeeze

Whatever the arguments about PRA Group's (NASDAQ:PRAA) underlying financial performance, there is really no argument that the stock market performance has been abysmal, with the shares down almost 40% since my last update on the company. PRA Group is trying to deal with multiple headwinds at once - the bankruptcy business has fallen off sharply, regulatory impediments are increasing, supply is tight, and the company is no longer in a part of the cycle that is as conducive to attractive collections numbers.

PRAA has navigated cyclical ups and downs before, and I believe the company will do so successfully once again. It's a high-risk call, though, as the company can do little to influence supply or the regulatory environment and the company's size makes outperformance more challenging. I believe the market is assuming a pretty sharp drop in the long-term profitability of the business that doesn't fully account for the potential of the non-U.S. business, nor the money to be made when large traditional sellers return to the market. Given the challenging accounting here and the generally reviled nature of the debt collection industry, I believe this is a story with high risk to offset the significant potential gains if 20% ROEs are still in play on a long-term basis.

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PRA Group Feeling A Tough Squeeze

Seeking Alpha: Amidst Multiple Distractions, PRA Group Keeps On Collecting

PRA Group (NASDAQ:PRAA) has gone nowhere fast over the last two years, as the company has seen a shift in the profitability of the charged-off debt it can buy and the debt collection industry has continued to evolve. Management has also added complexity, integration risk, forex risk, and regulatory risk to the model in expanding into the European market through its acquisition of Aktiv. Now add in an ongoing investigation from the CFPB that will almost certainly result in some sort of payout from the company.

Despite that backdrop, I still think the shares are undervalued and that the company's performance is starting to improve again. Amortization rates are higher, recent purchases are performing well, and the quality of the receivables looks good. From an industry perspective, there are still reasons to believe that substantial volume could become available in the next year or two and Aktiv offers sizable opportunities for capital deployment. There are above-average risks inherent to this company's model, but I believe fair value is in the mid-$60's to low-$70's today.

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Amidst Multiple Distractions, PRA Group Keeps On Collecting

Seeking Alpha: PRA Is Great, But Expectations May Be Greater Still

I don't like talking smack about the stock of good companies, and I like it even less when it's a stock that has been exceptionally strong for me as an investor. Even so, while I have relatively few worries about the quality of Portfolio Recovery Associates' (PRAA) business, I'm a little more concerned that sell-side analysts and investors are getting too eager to bid up PRA's potential.

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PRA Is Great, But Expectations May Be Greater Still

Seeking Alpha: Old Faithful Portfolio Recovery Associates Does It Again

The kind of performance Portfolio Recovery Associates (PRAA) delivers just doesn't get boring. Although debt recovery is not a well-liked business by any stretch, PRA has done a remarkable job of refining its model so as to identify only those who can pay their debts, and the extent to which those customers are likely to respond to particular collection methodologies. Moreover, PRA has done a very good job of adhering to above-average standards such that it is one of the preferred buyers in the market and a likely beneficiary of rule/regulatory changes that could push some competitors out of the market.

Still, it's not as though the shares are notably cheap. The valuation model I use is very sensitive to changes in inputs like collection rates and discount rates, but almost all of the results end up falling into a valuation range of about $150 to $175. Further consolidation in the debt collection space and/or continued outperformance on collections and collection efficiency could certainly make those estimates conservative, but it's hard to see enough margin of safety here for me to recommend new investors make big purchases at these prices.

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Old Faithful Portfolio Recovery Associates Does It Again

Seeking Alpha: Can Portfolio Recovery Associates Keep Up An Impressive Run?

Debt collectors are hardly popular, but the reality is that they fill a critical niche in the credit cycle and ultimately keep rates lower than they would otherwise be. Not surprisingly, the housing crunch and the resulting recession created a flood of defaulted receivables for Portfolio Recovery Associates (PRAA) to buy.

Now, though, delinquencies are falling and U.S. households continue to deleverage. Can Portfolio Recovery continue to thrive by expanding its operations in areas like legal collections and bankruptcy and by out-executing the competition with better pricing discipline and operational excellence?

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Can Portfolio Recovery Associates Keep Up An Impressive Run?

Seeking Alpha: Steady As She Goes At Portfolio Recovery Associates

When it comes to buying charged-off debts and then trying to collect them, surprises are seldom ever a good thing. So it's probably just as well that Portfolio Recovery Associates (PRAA) offered few surprises this quarter. This company is always going to be controversial - the accounting is confusing for those unaccustomed to it, the IRS is investigating the company's tax calculation policies, there's more regulation and oversight coming, and it's an inherently difficult thing to collect on debt.

All of that said, PRAA is one of the best at what it does and there's more than enough room for the company to continue growing.

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Steady As She Goes At Portfolio Recovery Associates

Seeking Alpha: Unsavory Business And Murky Accounting Undervalue Portfolio Recovery

At the risk of climbing on a soapbox, isn't it interesting how people generally expect others to honor their obligations to them, but they get quite resentful when they are held to account on their own obligations? Portfolio Recovery Associates (Nasdaq: PRAA) is the largest publicly traded pure-play in a very unsavory business – debt collection. Not only does PRA have to contend with trying to get money from people who either cannot or do not want to pay, but the company is further burdened with an ever-shifting legal, legislative, and accounting environment. Perhaps it's little wonder then that these shares look quite cheap.

A Vital, But Disliked, Link In The Credit Chain
The availability of capital is predicated on the idea that lenders get their money back and/or can avail themselves of legal remedies to secure repayment. If borrowers are allowed to default and walk away too easily, the price of money shoots up and the availability drops. To that end, Portfolio Recovery occupies an important niche in the credit chain – PRAA buys up receivables that creditors could not not collect, takes the risk upon itself, and profits if it can be more successful in securing repayment.

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Unsavory Business And Murky Accounting Undervalue Portfolio Recovery