On Nov 10, 2016, we issued an updated research report on PRA Group Inc. (PRAA - Free Report) .
The company recently released its third-quarter results, wherein earnings of 68 cents missed the Zacks Consensus Estimate roughly by 11.7%. The bottom line also declined 20% from the year-ago quarter due to lower revenues. Moreover, adjusted net income decreased 23.4% to $31.7 million. Despite the lower-than-expected earnings the company remains optimistic that its long-term growth will be driven by its acquisitions, low operating costs, decline in the cost of capital and operational efficiency.
In spite of its small scale operations, PRA Group, holds a solid position in the receivable management market. The company continues to invest in new portfolios of debt in the U.S. and the U.K. to improvise its underwriting results. Though revenues from finance receivables declined 3% in the third quarter, investment in new finance receivables of $161.3 million raises optimism.
Another strength of the company is its Fee-for-Service business, which has been improving over last few years. The business started growing since 2012, primarily driven by the fee income from the U.K. business, acquisition of Mackenzie Hall and higher revenues from PRA Government Services. During the first nine months of 2016, the fee income rose 24% year over year.
The company has undertaken several mergers, acquisitions and alliances to diversify its business portfolio. This has not only boosted the company’s revenue generating ability but also enhanced its competitive strength. As the company’s traditional debt collection business matures and becomes more competitive, businesses in related fields is certainly a long-term positive for PRA Group.
PRA Group has also shown commendable expense management, as reflected through a 12% decline in total operating expense in the third quarter.
However, the company faces a number of headwinds. PRA Group’s cash collection business, which lent it a competitive edge in the past, has started to underperform. During the first nine months of 2016, the company witnessed a decline of 2.3% year over year in cash collections. This in turn severely impacted margins.
In addition, rise in borrowing costs leverage has resulted in higher interest expenses for the company. This might make the company more vulnerable to adverse economic conditions or industry hazards. On a year-over-year basis, interest expenses increased 33% and borrowings increased 10% during the first nine months of 2016, leading to further deterioration of financial leverage.
Zacks Rank and Stocks to Consider:
PRA Group Presently carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Investors may also consider other property and casualty players like Chubb Ltd. (CB - Free Report) , CNA Financial Corporation (CNA - Free Report) and Everest Re Group Ltd. (RE - Free Report) . All of these stocks carry a Zacks Rank #2 (Buy).
CNA Financial delivered positive surprises in three of the last four quarters but with an average miss of 18.69%.
Chubb beat expectations in three of the last four quarters with an average beat of 4.06%
Everest Re delivered positive surprises in three of the last four quarters with an average beat of 25.64%.
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