Operational Improvements Will Strengthen US And European Performance

Key Takeaways

• U.S. supply and legal collection improvements suggest increased revenue potential and earnings growth from higher purchase volumes and efficiencies.
  
• Expansion and efficiency in European operations and offshore strategies are set to enhance profitability and net margins.
  
• Limited European portfolio supply, rising legal costs, and high leverage may strain PRA Group's financial health, impacting revenue growth and cash collections.

Catalysts

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

• PRA Group's capitalizing on the strong U.S. supply environment, along with the expectation of elevated U.S. portfolio supply in 2025, indicates potential for increased revenue and earnings due to higher purchase volumes and attractive pricing.
  
• The operational improvements in the legal collections channel, resulting in a 51% increase in U.S. legal cash collections, are expected to enhance cash collections, revenue, and earnings as efficiency and cycle times improve.
  
• The company's expansion and increased efficiency in its European operations, characterized by a diversified approach and stable management, position it to seize additional purchasing opportunities, potentially boosting revenue and net margins in a market where competitors may be pulling back.
  
• The strategic increase in offshore collectors is expected to cut overhead costs and enhance cash efficiency, leading to improved net margins and profitability through optimized cost structures and operational adaptability.
  
• PRA Group's enhancement in cash-generating initiatives and anticipated high cash collection growth between 8% to 10% in 2025 will likely support improved earnings, with a focus on maintaining or improving cash efficiency ratios.

PRA Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PRA Group's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $164.2 million (and earnings per share of $4.32) by about December 2027, up from $43.4 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 9.2x on those 2027 earnings, down from 20.0x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

PRA Group Future Earnings Per Share Growth

Risks

• The European market is more spot-driven with modest portfolio supply, leading to potential revenue instability if predicted buying doesn't materialize, impacting revenue growth.
  
• Legal collection costs have increased and are expected to continue rising, which could pressure earnings and delay cash efficiency improvements.
  
• High leverage levels from increased portfolio investments may strain financial health, particularly if debt levels remain above the long-term target of 2x to 3x, potentially affecting net margins.
  
• Continued reliance on U.S. legal collections, which have a longer cash-pooling timeline, could be negatively affected by economic shifts, impacting earnings and cash collections.
  
• If the expected portfolio supply fails to meet levels required for maintaining ERC, the company's ability to achieve projected cash collection growth and future revenues could be at risk.

Valuation

• The analysts have a consensus price target of $29.33 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 2027, revenues will be $1.4 billion, earnings will come to $164.2 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 10.9%.
• Given the current share price of $22.04, the analyst's price target of $29.33 is 24.9% 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.