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PRA Group (PRAA) Divests Govt. Business, Earnings Suffer
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On May 18, 2017, we issued an updated research report on PRA Group, Inc. (PRAA - Free Report) .
During the first quarter, the company’s operating earnings of $0.38 per share in the year-ago quarter not only missed the Zacks Consensus Estimate by 13.6% but also deteriorated 55.3% from the year-ago quarter. The bottom-line deterioration can be mainly attributed to a substantial decline in revenues.
The company’s divesture of government business affected both of its revenues and margins. In the first quarter, the company witnessed a year-over-year decline of39.3% and 6% in fee income and receivable income, respectively, primarily due to the divesture.
Given the aforesaid factors, the PRA Group stock seems to have fallen out of favor with investors. Shares of the company have lost 5.6% compared with the Financial Miscellaneous Services industry’s 19% decline, year to date.
The company’s operating expenses have increased at a five-year CAGR (2009–2015) of 23.5%. Although the company witnessed a year-over-year decline in operating expenses by 3.2% in 2016 and 0.6% in the first quarter of 2017, its compensation and employee service-related expenses as well as legal collections costs continue to increase. PRA Group requires to enhance its cost management in order to improve earnings.
Another major concern for the company is its rising debt level that has led to a continuous increase in interest expenses. In 2016, interest expenses increased 35% year over year to followed by a 6.5% increase in the first quarter of 2017. The rise in debt financing continues to drain a significant portion of its operating cash flow to service debt payments.
The stock has also been overvalued than its peers in some respects. PRA Group is currently trading at 1.77X price to book value multiple. This is expensive when compared with the Zacks categorized Financial Miscellaneous Services industry’s multiple of 1.65X. Moreover, the Price to Cash Flow (PCF) ratio for the stock is 26.55, which compares unfavorably with the industry average of 2.98, suggesting a significant level of overvalued trading.
Despite the headwinds, the company’s substantial investment in receivables raises of optimism about improved receivable income.
The company also expects its fee income to increase on the back of its planned acquisitions and other strategic initiatives. In May 2017, the company has reached a settlement with the Internal Revenue Service. PRA Group will now utilize a new tax methodology to recognize net finance receivable (NFR) revenues, effective tax year 2017. The PRA Group will not be required to pay any interest or penalties related to the prior period.
Cigna’s earnings beat estimates in three of the last four quarters with an average earnings surprise of 1.35%.
Another insurer, James River Group, delivered positive earnings surprises in all of the last four quarters with an average beat of 9.47%.
Old Republic International’s earnings, although surpassed expectation in only two of the last four quarters, it reported an average beat of 11.37%.
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PRA Group (PRAA) Divests Govt. Business, Earnings Suffer
On May 18, 2017, we issued an updated research report on PRA Group, Inc. (PRAA - Free Report) .
During the first quarter, the company’s operating earnings of $0.38 per share in the year-ago quarter not only missed the Zacks Consensus Estimate by 13.6% but also deteriorated 55.3% from the year-ago quarter. The bottom-line deterioration can be mainly attributed to a substantial decline in revenues.
The company’s divesture of government business affected both of its revenues and margins. In the first quarter, the company witnessed a year-over-year decline of39.3% and 6% in fee income and receivable income, respectively, primarily due to the divesture.
Given the aforesaid factors, the PRA Group stock seems to have fallen out of favor with investors. Shares of the company have lost 5.6% compared with the Financial Miscellaneous Services industry’s 19% decline, year to date.
The company’s operating expenses have increased at a five-year CAGR (2009–2015) of 23.5%. Although the company witnessed a year-over-year decline in operating expenses by 3.2% in 2016 and 0.6% in the first quarter of 2017, its compensation and employee service-related expenses as well as legal collections costs continue to increase. PRA Group requires to enhance its cost management in order to improve earnings.
Another major concern for the company is its rising debt level that has led to a continuous increase in interest expenses. In 2016, interest expenses increased 35% year over year to followed by a 6.5% increase in the first quarter of 2017. The rise in debt financing continues to drain a significant portion of its operating cash flow to service debt payments.
The stock has also been overvalued than its peers in some respects. PRA Group is currently trading at 1.77X price to book value multiple. This is expensive when compared with the Zacks categorized Financial Miscellaneous Services industry’s multiple of 1.65X. Moreover, the Price to Cash Flow (PCF) ratio for the stock is 26.55, which compares unfavorably with the industry average of 2.98, suggesting a significant level of overvalued trading.
Despite the headwinds, the company’s substantial investment in receivables raises of optimism about improved receivable income.
The company also expects its fee income to increase on the back of its planned acquisitions and other strategic initiatives. In May 2017, the company has reached a settlement with the Internal Revenue Service. PRA Group will now utilize a new tax methodology to recognize net finance receivable (NFR) revenues, effective tax year 2017. The PRA Group will not be required to pay any interest or penalties related to the prior period.
Zacks Rank & Stocks to Consider
PRA Group has aZacks Rank #3 (Hold)..
Some better-ranked insurers are Cigna Corporation (CI - Free Report) , James River Group Holdings, Ltd. (JRVR - Free Report) and Old Republic International Corporation (ORI - Free Report) . All of the stocks carry Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Cigna’s earnings beat estimates in three of the last four quarters with an average earnings surprise of 1.35%.
Another insurer, James River Group, delivered positive earnings surprises in all of the last four quarters with an average beat of 9.47%.
Old Republic International’s earnings, although surpassed expectation in only two of the last four quarters, it reported an average beat of 11.37%.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
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