PRA Group Languishing Ahead Of New Supplies Of Charged-Off Debt

The pandemic was weird.

A normal cycle would have seen a surge in bad debts that banks and other creditors would ultimately write off and sell to recovery companies like PRA Group (NASDAQ:PRAA) and Encore (ECPG). Unlike prior cycles, consumers got an unusual level of government assistance this time, propping up their solvency and the credit quality of lenders. With that, the expected surge in write-offs never really happened, and PRA Group and Encore have been watching their inventory of charged-off receivables dwindle, hitting cash collections, revenue, earnings and cash flow.

PRA Group shares are down about 25% since my last update, while Encore has done slightly worse. I have no expectations that a quick turnaround in reported financials is around the corner, but I do see rising consumer debt, declining credit quality, and a tougher economic environment in 2023. Should that all play out, charge-offs will start increasing more meaningfully (likely in late 2023 or in 2024), PRA Group will have more to collect, and earnings will rebound. Whether investors want to wait for that rebound is up to them to decide, but the shares do look undervalued below the $40’s.

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PRA Group Languishing Ahead Of New Supplies Of Charged-Off Debt

PRA Group Undervalued, But Needs More Collections Growth To Augment Efficiency

 

PRA Group (PRAA) looks a lot like a story of two drivers right now – one good, one not so good. On the good side, PRA Group has done exceptionally well in terms of its operating efficiency, and while 2022 likely can’t match 2021 levels, improving efficiency is still positive over the long term. The not-so-good driver is the supply of new receivables for PRA to collect; management isn’t going to compromise on quality, but the stock really needs to see sustained supply improvements and a better outlook for collections and revenue growth.

PRA Group shares have done alright since my last update, rising about 15%, but continuing to underperform its only publicly-traded comp Encore Capital (ECPG). With around 10% undervaluation today, these shares are still worth a look, but I believe the company really needs to accelerate revenue growth to close that performance gap with Encore Capital.

 

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PRA Group Undervalued, But Needs More Collections Growth To Augment Efficiency

Worries About Growth Keeping A Lid On PRA Group Shares

 

Despite some strong quarterly results, PRA Group (PRAA) shares have gone nowhere fast this year, as investors remain more concerned about future growth prospects than excited about strong recent performance. This is understandable, to a point, but I do believe the Street is undervaluing the long-term value of meaningful efficiency improvements in the operations even if the future supply of collectable receivables is lower than previously hoped.

My fair value range on PRAA shares has been in the $40 - $46 range over my last two updates (here and here), and that's basically still the case, as model refinements narrow that valuation range to $41 to $45. A faster pace of purchasing would likely be the best source of near-term upside, followed closely by an even better sustained trend of cash operating costs, while a return to more activity in legal-channel collections and bankruptcies may not be as well-received by the Street.

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Worries About Growth Keeping A Lid On PRA Group Shares

PRA Group Shares Still Waiting On Questions Of Sustainability And Supply

Strong execution has done no favors for the shares of PRA Group (PRAA). The shares are basically flat since my last update on the company, despite a good quarter, as the Street remains concerned about the sustainability of collections and margins, as well as the diminishing outlook for a surge in quality charged-off paper over the next year or two. Moreover, I suspect that investors are concerned about the growing significance of the European operations, as this segment was slower to get up to speed and still carries some weight from that.

Supply issues do concern me, but I believe that is outweighed by the undervaluation in the shares today. I expect core earnings and FCF growth in the range of 6% to 8% over the next decade, with both supporting a fair value in the $41 to $46 range. The biggest catalyst for the shares would likely be a meaningful improvement in the acquisition of charged-off receivables.

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PRA Group Shares Still Waiting On Questions Of Sustainability And Supply

Another Strong Collection Quarter For PRA Group, But Trends Remain Hard To Read

Maybe it’s looking a gift horse in the mouth, but PRA Group’s (PRAA) strong third-quarter results came with some caveats - namely the question of whether underlying collection performance on receivables has fundamentally improved and when (and how much) supply will improve for the company. Given all of the unusual factors playing into 2020 results, it’s all but impossible to gauge underlying collections performance, and while charge-offs should accelerate in 2021, “should” only gets you so far.

I though PRA Group shares were pretty fairly valued back when I last wrote on the shares, and the shares are down about 15% since then. I can see two opposing potential drivers (apart from just profit-taking) - bank reports on reserves and charge-offs have been pretty mild (suggesting weaker forward supply), while gridlock in Washington has halted meaningful progress on further stimulus (hurting debtors’ ability to pay). While I acknowledge some pretty substantial unknowns in the model, I do believe that fair value remains in the low-to-mid-$40s, making PRA Group undervalued enough to consider today.

 

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Another Strong Collection Quarter For PRA Group, But Trends Remain Hard To Read

It's Early, But PRA Group's Business Is Holding Up Well So Far

While PRA Group’s (PRAA) first quarter results probably shouldn’t have propelled the shares higher by a third, the shares likewise shouldn’t have declined so much going into earnings – such is the chilling effect of uncertainty on investor behavior. In any case, I was surprised to see how well PRA’s business performed in the first quarter and how confident management sounded regarding the business for the remainder of 2020. Uncertainty is still the word of the moment, but the company’s operating efficiency, both in terms of collections and costs, is holding up quite a bit better than expected.

PRA Group isn’t out of the woods yet with respect to Covid-19. With only the first steps being made toward re-opening in most states, there are still a lot of unknowns regarding employment levels, earnings, and so on. Moreover, some of the decisions the company is making today (delaying legal proceedings, granting hardship relief, et al) will impact collections in the coming quarters. Still, I believe the company remains on a trajectory to generate mid-to-high single-digit long-term revenue growth with low-to-mid teens annualized free cash flow growth and adjusted mid-teens ROEs, supporting a fair value in the high $30’s today.

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It's Early, But PRA Group's Business Is Holding Up Well So Far

Amid Intense Macro Uncertainty, PRA Group Executing Well

To at least some extent, the Covid-19 outbreak in North America and Europe is an “all bets are off” event for PRA Group (PRAA) that massively complicates modeling over the next year or two. It’s pointless to attempt to collect on debts incurred by people who have no income, and there is still significant uncertainty as to whether there will be additional shelter-in-place orders around the country and when the country will be back to “business as usual”.

It’s not completely accurate to say that PRA Group can just hunker down and wait for conditions to improve – there are ongoing costs to operate the business – but the company’s receivables don’t expire to any meaningful extent. Sooner or later, people will be able to pay again and although Covid-19 is going to limit the company’s near-term earnings potential, the longer-term outlook is still fairly good, particularly so given the progress made in building up the company’s digital and legal collections capabilities.

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Amid Intense Macro Uncertainty, PRA Group Executing Well

PRA Group Showing Good (And Long Awaited) Progress

It’s been tough to stay patient with PRA Group (PRAA), particularly as management has levered up the business during a time of declining performance. It does seem, though, that improvements and investments in the business are finally showing to show up in the results, and with the longer tail to investments made in legal collections, I expect ongoing improvements for at least a few quarters.

Valuation is less compelling after the post-earnings jump. I believe a mid-$30s fair value is reasonable on the basis of my discounted cash flow, discounted core earnings, and EV/EBITDA approaches, but that doesn’t leave exceptional upside from here.

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PRA Group Showing Good (And Long Awaited) Progress

PRA Group Doing Okay, But Needs To Find Another Gear

PRA Group (PRAA) has been a frustrating stock to follow and own lately, as management’s performance on margins has been underwhelming, while continuing to use leverage to buy more charged-off debt. A still-healthy economy is helping on the collections side, while rising charge-offs point to more supply in the relatively near future.

I’m still concerned about the possibility that there has been a permanent change in PRA Group’s core market and that collections margins will never be what they once were. Likewise, PRA’s sheer size is a limit to how much cherry-picking the company can do when buying new inventory. I can still argue for a price in the low $30’s, but I’m growing frustrated with the slow pace of margin improvement and management’s credibility could use some improvement.

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PRA Group Doing Okay, But Needs To Find Another Gear

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 Once Again Exceeds Expectations On Healthy Cash Collections

The changes PRA Group's (NASDAQ:PRAA) management have made over the last few quarters continue to pay off in terms of improved performance. Although the shares haven't offered much performance over the past year (particularly when compared to rival Encore (NASDAQ:ECPG)), the company appears to be on a better trajectory and expectations are moving higher. With double-digit return potential from here and the potential for operating conditions (and results) to improve further, this remains a worthwhile name to consider.

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PRA Group Once Again Exceeds Expectations On Healthy Cash Collections

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