Global Expansion And Investments In Legal Collections Will Strengthen Future Earnings

Key Takeaways

• Global expansion and strategic investments are set to drive revenue growth and enhance net margins over time.
  
• Operational efficiency initiatives, including offshoring, are aimed at improving earnings through reduced costs and enhanced processes.
  
• Unpredictability in regulation and foreign exchange, alongside technological uncertainty, pose risks to revenue growth and operational efficiency despite high legal collection investments.

Catalysts

A financial services company, engages in the purchase, collection, and management of portfolios of nonperforming loans worldwide.

• PRA Group's expansion of seller relationships globally and record portfolio purchases provide a strong foundation for future revenue growth.
  
• Investments in legal collection channels are expected to drive future cash collections, impacting net margins positively over time.
  
• Optimization initiatives in U.S. call centers and legal recovery processes are anticipated to enhance operational efficiency, contributing to improved earnings.
  
• The offshoring strategy is creating a more variable cost structure, which is likely to enhance net margins by reducing operational costs.
  
• Stabilization of U.S. portfolio pricing and strong supply conditions in both U.S. and European markets are expected to sustain and potentially increase earnings growth.

PRA Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PRA Group's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $126.6 million (and earnings per share of $3.19) by about May 2028, up from $70.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 10.4x today. This future PE is greater than the current PE for the US Consumer Finance industry at 10.0x.
• Analysts expect the number of shares outstanding to grow by 0.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

PRA Group Future Earnings Per Share Growth

Risks

• The competitive landscape in Europe remains unchanged despite challenges faced by competitors, leading to no significant reduction in competition, which could affect future revenue growth as the expected advantage from reduced competition did not materialize.
  
• There is uncertainty regarding the long-term impact of technological advancements, like AI, on operational efficiency; potential delays or failures to implement these technologies could hinder improvements in net margins.
  
• The regulatory environment remains unpredictable, which may deter new entrants but retains complexity and potential risks for current operations, possibly impacting operating expenses and net earnings.
  
• The significant investment in legal collections, while intended to drive future cash growth, creates a short-term drag on earnings, posing risks to achieving anticipated improvements in cash efficiency and net income.
  
• Potential foreign exchange volatility, with an adverse impact already noted, could affect international revenues and overall earnings, particularly if the dollar continues to strengthen against other currencies.

Valuation

• The analysts have a consensus price target of $29.0 for PRA Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $24.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $126.6 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 11.4%.
• Given the current share price of $18.56, the analyst price target of $29.0 is 36.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.