PRA Group's Finances, Growth Plans Impress; Costs a Drag

We issued an updated research report on PRA Group Inc. PRAA on Jan 12, 2016.

The company's impressive inorganic growth initiatives have helped it expand beyond the primary debt collection business into government collections, audit services and claims settlement. Both cash collections and collector productivity (cash collections per hour paid) continue to be at record highs as efficiency improves at PRA Group's operating call centers and the company continues to hire new collectors.

Moreover, the company has been amending its credit facility time and again to strengthen its financial position. This should, in turn, help it to suitably capitalize on forthcoming growth opportunities. Last month, PRAA Group raised its domestic revolving credit commitments by $125 million to $725 million. The increase in credit facility is expected to strengthen the company's financial base and help it undertake strategic investments. A strong balance sheet further enables the company to invest in an improving portfolio of acquired accounts in North America and Europe.

Significant investments in new portfolios of debt in the U.S. and the U.K. have also improved the company's bottom line. This streak of deal wins and portfolio acquisitions will stimulate future collection activity, thereby strengthening the supply and pricing chain as well as the fee income businesses of PRA Group.

However, the global economic crisis has weighed on the company's operating leverage. Moreover, high operating expenses and adverse effects of lawsuits imposed on PRA Group are likely to weigh on margins going ahead.

Also, burgeoning interest expenses due to rise in borrowing costs and increase in financial leverage are deterrents to growth for the company. Additionally, increased borrowings have led to deterioration in financial leverage, which might make the company more vulnerable to adverse economic conditions or industry hazards. Such increased debt levels may also necessitate the use of a significant portion of the operating cash flow to service debt payments, thereby limiting the company's financial flexibility.

PRA Group is expected to report fourth-quarter 2015 earnings in the first week of Mar 2016. The Zacks Consensus Estimate is pegged at $1.08 per share, which represents year-over-year growth of 11.98%.

PRA Group currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the financial services space are General Finance Corporation GFN, Emergent Capital, Inc. EMG and On Deck Capital, Inc. ONDK. While General Finance sports a Zacks Rank #1 (Strong Buy), both Emergent Capital and On Deck Capital hold a Zacks Rank #2 (Buy).

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