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PRA Group Troubled by Rising Costs: Time to Sell the Stock?

On Apr 18, 2016, we issued an updated research report on PRA Group Inc. PRAA.

PRA Group has been experiencing higher expenses over the last couple of years. Operating expenses grew at a six-year CAGR of 23.5% in 2015. This in turn has been weighing on margins that have been contraction over the last couple of years. Moreover, a rise in borrowing costs and increase in leverage have resulted in higher interest expenses.

Moreover, higher borrowings led to deterioration in financial leverage. A higher debt level might call for the deployment of a significant portion of the operating cash flow to service debt payments, thereby limiting the company’s financial flexibility.

Additionally, the company operates in a highly competitive accounts receivable management industry that poses as a concern. Also, a drop in total estimated collections compared with the purchase price ratio is a headwind.  

With respect to the earnings trend, the company missed expectation in three of the last four quarters. The company is expected to release first-quarter results in the first week of May. However, our proven model cannot conclusively state whether the company will beat or miss expectation. This is because although the company’s Earnings ESP of +4.21% increases the predictive power, it has a Zacks Rank #5 (Strong Sell), which does not favor an earnings beat. Moreover, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement.

Nonetheless, PRA Group has expanded beyond its primary debt collection business into government collections, audit services and claims settlement with strategic acquisitions. These have also helped in widening its global footprint. Also, each of these business lines is supported by a solid balance sheet, which enables the company to invest in an improving portfolio of acquired accounts.

Stocks to Consider

While we prefer to avoid PRA Group presently, some better-ranked stocks from the same space are Apollo Residential Mortgage, Inc. AMTG, Cielo S.A. CIOXY and FleetCor Technologies, Inc. FLT. Each of these stocks carries a Zacks Rank #2 (Buy).

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
PRA GROUP INC (PRAA): Free Stock Analysis Report
FLEETCOR TECH (FLT): Free Stock Analysis Report
APOLLO RES MTGE (AMTG): Free Stock Analysis Report
CIELO SA ADR (CIOXY): Free Stock Analysis Report
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