PRAA

In general good deals on good companies don’t come along very often but I believe that PRAA is that very situation. PRAA is a debt collection company, best of breed. Their stock has not performed despite the business doing well. In 2013 they were at 49 and today they are falling on no news to 48.8 from a high a couple of months ago of 60.

The concerns as I understand them are as follows.

  1. they recently purchased their equivalent in europe for ~ 880 million dollars (PRAA market cap is 2.5 billion) which is a pretty large bite to take. These companies basically borrow money to buy debt and then their profit is how much they are able to collect vs what they have to pay. So they purchased this company and all its debt a 6? months ago and now the dollar has strengthen considerably so each euro they collect now is not worth as much converted back into dollars.

  2. An uptick in interest rates will make getting new debt more expensive thus increasing expenses.

But here is the thing. This is a company that has an incredibly talented management team that navigated the financial crisis.

Revenue is growing.

Sept. 30, 2014 815.09M
June 30, 2014 773.88M
March 31, 2014 759.50M
Dec. 31, 2013 735.14M
Sept. 30, 2013 704.53M
June 30, 2013 657.29M
March 31, 2013 622.22M
Dec. 31, 2012 592.80M
Sept. 30, 2012 556.64M
June 30, 2012 520.39M

EPS is growing, those last two quarters were hindered by the acquisition costs.
Sept. 30, 2014 3.469
June 30, 2014 3.389
March 31, 2014 3.499
Dec. 31, 2013 3.439
Sept. 30, 2013 3.229
June 30, 2013 2.949
March 31, 2013 2.719
Dec. 31, 2012 2.459
Sept. 30, 2012 2.273
June 30, 2012 2.117
March 31, 2012 1.99

If any of you have HG subscription, options or Fool one TMF Canuck knows this company inside and out. I’d suggest reading his posts for more detail.

-Ethan

14 Likes

Hi Ethan,

I don’t own it but it has been a great put writing candidate courtesy of MFO. I might take assignment if it comes to it. I agree, it’s a well run company with decent valuation.

Anirban

1 Like

Hi Ethan,
I will chime in and agree. I have owned PRAA for years and it is one of my largest positions. It became that way mostly because of its steady price increase. Thanks for the post because I have been trying to figure out why the recent swoon. Earnings are due out in a few days and I am wondering if news of the results have leaked. In any event, if it is because of currency exchange rates I might be tempted to bite off a little more.

It is a very predictable and productive company in that they buy debt in large packages for pennies on the dollar and over a period of years, collect back that debt for more than they paid for it. The recollection profile for a given package of debt is very predictable once the first year or two of collections has been tracked, therefore future revenue streams are very predictable.

The PEg ratio is close to 1 or less and has been so for years. I think it is because of concerns of government intervention/regulation in the business. I think It also takes a hit from market perception because of the industry. Debt collection is probably right up there with cigarette manufacturers. But from my perspective, the regulation /perception risk plays to their advantage. These guys are one of the biggest in a very fragmented business. They are also known as being very well run and have never been accused of the shady side of how to run a debt collection business. Because of that the threat of regulation has benefits to them because the smaller, less well run firms will not be able to compete. Less competition will mean better prices on future debt purchases.

Anyway, I don’t have an HG sub (but may be getting one from the recently posted deals) and I am always trying to find more info about them. Especially after yesterday’s price drop with no publicly released reasons, so thanks again.

Randy

“Possible Bargain” x-post at Value Hounds

http://discussion.fool.com/i-have-no-position-in-pra-group-and-i…

Denny Schlesinger

1 Like

Thanks Denny,
I didn’t realize there was a good board, I will follow it.

I am not sure I agree with your comments of waiting for the certainty. Whenever the regulations come I believe PRA will come out okay. In the end the banks will have to do something with their debt. In my view, the main uncertainty is the timing of the regulations. If you wait for resolution you will pay a much higher price.

In the end, uncertainty is the reason the stock market returns are better than other investments. Risk vs reward, it’s all about finding the best rewards with the lowest risks, not about eliminating all risk.

Randy

2 Likes

In the end, uncertainty is the reason the stock market returns are better than other investments. Risk vs reward, it’s all about finding the best rewards with the lowest risks, not about eliminating all risk.

Randy

Respectfully, you are confusing correlation with causation. Risk is correlated with returns but risk is not the cause of returns. If it were, one way to get rich would be to jump out of airplanes without a parachute. :wink:

Returns are caused by earnings or positive cash flow. Returns are modulated by how much you pay for the investment. Typically if you perceive higher risk you are less willing to pay for the investment which is what causes the correlation.

With respect to PRAA, I think that enthusiasm drove the price too high and a top is the cause of the volatility since late 2013. Until the “trading range” (50-64) is resolved I would not buy for the long term but just trade the range.

http://softwaretimes.com/pics/praa1-02-28-2015.gif

Denny Schlesinger

3 Likes

Hi Denny,
I don’t disagree with what you say but I think you miss the point of my comment. Returns are caused by earnings. I agree. The reason that a stock price doesn’t recognize those future earnings at their true value is because there is uncertainty that the earnings will infact happen. That is the risk and it shows in the stock price. Sometimes the actual risk is different than the perceived risk and you get a price discrepancy and an inefficient market. But even in a completely efficient market, the reason that stocks are the long term good investment they are is because as the owner of the company you take the risk that the earnings may not occur. Bonds typically pay less because the perceived risk is less. CDs pay even less because the risk is almost non existent.

My point in all that is you are taking risk with any company you invest in. The choice you have is to find companies that are giving you the most upside with the least risk , ie looking for inefficiencies in pricing. Your example of jumping out of a plane is poor because there is no reward. A better example is amazon versus walmart. You pay much less for a dollar of earnings in Walmart than amazon because the perceived risk is less.
As well as the future reward. The actual risk and reward can be argued, and that is why we have a stock market.

The question here is whether the government regulation changes are a real risk to PRAA future earnings or an exaggerated perceived risk. We may differ on this point. I am totally good with that.

Randy

4 Likes

“In the end the banks will have to do something with their debt.”

I thought the same thing a number of years ago.

In my neighborhood a bank is holding a foreclosed mortgage on a house that is unsaleable at anywhere near what they are in it for because of water damage and total neglect by previous owners. They tried to sell it, got no takers, took it off the market and are now probably have it on their books as being worth twice what they could actually get for it.

Hello,

New poster here. Been away from TMF for awhile and an very happy to have discovered this great board. Many thanks, Saul.

Re:PRAA

Because of the discussion here, I have spent some time reviewing this company. They have a great record and have deserved the HG rec’s. IMO, what has changed recently (8-9 months) is the risk profile. Specifically, they have taken on a historically high level of debt to acquire a European company. There is now the reduction in financial balance sheet power AND the risk of assimilating a major acquisition in an international market where the company has no experience. These risks are added to the IRS dispute which has grown to very serious dollars on PRAA’s balance sheet. (over 1/4 billion dollars).

Each individual investor must manage their level of risk on a portfolio basis and an individual equity basis. IMO, the reason that the stock is at the lower end of the range that Denny referred to is an aggregate
re-pricing of this change in its risk profile. That said, at some point the reduced price will over-compensate for the increased risk and purchases should be amply rewarded. That the price has not come down far is a reflection of management’s strong following and the performance that has engendered that following.

Randy, I believe that IF management’s exceptional performance continues, then the additional risk that has been assumed will result in much greater returns. In this case, additional risk assumption will not be similar to jumping out of an airplane without a parachute. Best
regards to you, Denny!

2 Likes

Thanks for the input Creelon.
Your thoughts seem well founded and insightful. With earnings coming out this week I believe we will see some of the early returns on whether management is handling these challenges well although it probably isn’t the final word in any case.

Good luck to all the present owners of PRAA. And if you don’t own any, a small purchase would make a good long term purchase in my opinion.

Randy

1 Like

Hi creelon, long time no talk!

Each individual investor must manage their level of risk on a portfolio basis and an individual equity basis. IMO, the reason that the stock is at the lower end of the range that Denny referred to is an aggregate
re-pricing of this change in its risk profile. That said, at some point the reduced price will over-compensate for the increased risk and purchases should be amply rewarded. That the price has not come down far is a reflection of management’s strong following and the performance that has engendered that following.

This is a more explicit way of saying what I said, wait for the risk to normalize (a breakout on the high side) or wait for the price to fall to “over-compensate for the increased risk.”

Denny Schlesinger

Hello Randy,

I should have mentioned that I see some wonderful synergy with the acquisition of Aktiv. PRAA will now be able to deal with international
banks on an integrated basis where a portfolio is spread over many nations. They also have the ability over time to integrate Aktiv collections with some existing call centers, keeping the transactions
in-house. This is not just more efficient, but will allow for much better quality control, which is an important differentiator of long term returns.
The increased scale of their business will itself allow for synergistic savings on many levels.
The assimilation risk is mitigated by the retention of Aktiv’s leader to become the CEO of the European operation.
All that being said, you are right that the upcoming earnings report and cc will not answer all the questions. Time will be necessary to get a good feel for how the acquisition will work out. Some of the questions that I will be looking for answers to over time:

  1. How will the cost of Aktiv work out? There is a whole lot of goodwill
    involved in addition to the debt. It will take at least two years to see how Aktiv’s collections are progressing before there can be a valid
    revaluation of the assets purchased.
  2. How efficiently does management assimilate the acquisition? We should
    get some decent color on Monday how they are doing so far, but this is an ongoing process.
  3. What does the acquisition do to future deal flow? There is significant potential here, is it being realized? This will take time to tell the quality of the deal flow, but the quantity will be apparent sooner.
  4. How soon will management return the enterprise to more reasonable debt levels? I think this could be done fairly quickly, but want to see
    management state some goals in that direction.
  5. How are the former Aktiv owner/managers embracing the new enterprise? While money itself bridges cultures easily, business is done on the ground between human beings. PRAA can have the best systems and analytic models to purchase debt portfolios, but the folks in Oslo who have been doing it in European countries for many years have a smartphone full of contacts of folks who are actually selling the assets.

I won’t be able to listen to the call live, but I will catch it later and we can compare notes.

Mike

4 Likes

Hello Denny,

Glad to see you are still surviving in Vz!

Mike

Glad to see you are still surviving in Vz!

It’s a strange situation. Lot’s of stuff not available but much of what is is very cheap if you are dollar based. Take a six pack of beer. Where in the US can you get a premium six-pack for $1.60?

https://answers.yahoo.com/question/index?qid=20080526201512A…

Just back from the produce market. Split peas $0.12 a pound! Walmart Miami split peas $1.44. Chickpeas are expensive at $1.20 a pound! Amazon $2.99 a pound:

http://www.amazon.com/Garbanzo-Non-Irradiated-Certified-Veri…

The people who suffer are those the revolution swore to protect, the poor, they have to queue for hours to try to buy food and basic necessities: rice, sugar, flour, coffee, toilette paper. Can you believe that high productivity industrial farming is practically a crime according to our constitution? From the previous constitution:

“Articulo 105.- El régimen latifundista es contrario al interés social. La ley dispondrá lo conducente a su eliminación, y establecerá normas encaminadas a dotar de tierra a los campesinos y trabajadores rurales que carezcan de ella, así como proveerlos de los medios necesarios para hacerla producir.”

Google translate (improved):

“Article 105. The large land estates are contrary to the social interest. The law provides leading to their elimination, and establish rules to provide land to the peasants and rural workers who lack them and provide them with the means to make it produce.”

The US feeds the world because farm produce is subsidized with minimum prices. Venezuela imports food because prices are controlled and efficient farming is outlawed. Such is the revolution!

Denny Schlesinger

BTW, I get to fill the tank of my Toyota Corolla for US$0.03 generous tip included! How can the country not go broke?

1 Like

Hello,

I have reviewed the earnings report and listened to the conference call.
This is an interesting company because management has demonstrated a great deal of ability AND shareholder friendliness. They reported collections up 34%, net income from operations up 40% and diluted EPS up
2%. There is a large (25%+) short position outstanding and I looked to see elements of the bear case. My conclusion is that I like this company quite a bit but will defer purchases until some of the following gets resolved. Here is my thinking on the bear case. (no ranking implied):

1.Cash collections in North American operations peaked 2nd Q 14 and have fallen slightly last two Q’s.
2. Although rev. in last Q increased 36% net income hardly budged.
3. Tax rates q4 13 = 37.7%; Q4 14 =49.7%
4. Debt increased over $1 billion in 14
5. Growth in 14 came from acquisition (Aktiv) funded by debt.
6. Cash collections in Aktiv declined slightly from Q3 to Q4
7. Debt has grown much faster than equity
8. Goodwill has increased to nearly 540 mil.
9. Aktiv could take too much mgt. attention
10. The increased tax liability underscores the currency risk.
11. Return on avg. assets: 2013=11.5; 14=6.9%
12. Ongoing Consumer Financial Protection Bureau investigation.
13. Regulatory confusion paralyzes some sellers of debt.
14. IRS dispute scheduled for trial June 22, 2015 (241 mil.)

This is not meant to be an all-inclusive list of the short thesis, just what jumped out at me. I do not believe the stock is over-priced today but there does not seem any reason to jump in today. After the next cc,
I intend to review and perhaps, present the bull case.

Mike

7 Likes

Re:PRAA

Because of the discussion here, I have spent some time reviewing this company. They have a great record and have deserved the HG rec’s. IMO, what has changed recently (8-9 months) is the risk profile. Specifically, they have taken on a historically high level of debt to acquire a European company. There is now the reduction in financial balance sheet power AND the risk of assimilating a major acquisition in an international market where the company has no experience. These risks are added to the IRS dispute which has grown to very serious dollars on PRAA’s balance sheet. (over 1/4 billion dollars).

Just a few points for color:
PRAA is comfortable with the debt to equity ratio and have been there before albeit at a lower overall debt load;

The potential hit from the regulation authority has been estimated (by J. Gilies) at around $35M and that was a loose estimate but still far from 1/4 billion.

3rd, even though there is a risk due to debt on their big acquisition, their earnings/share has risen with all that debt burden but with only a small amount of time for revenue and earnings due to the late in the year assimilation.\

PS I color outside the lines so if my facts are not completely accurate, that’s on you. No intent to do so.

Mykie
Long PRAA and waiting to double the position but missed out on the sub $50/share price recently

Mykie,

That’s okay my friend, we all color outside the lines too. It’s called artistic license and the principle of individuality.

Just as long as none of us put out a ‘blank’ page or a pile of poop on purpose and try to call it ‘Art’. You know what I mean?

Now everybody on this board go buy a new box of crayons for the next six thousand or so posts, and just keep coloring, just keep coloring.

KLVanLiew

1 Like

Mykie, your PS made me laugh out loud. I upped my position from 6% to 9.9% on the fall from 53 to 48.8 . I’m with you on this and PRAA is my largest position now especially now that we are back around 54. I think people are overly concerned about the currency hit, sometimes it is going to be good, sometimes bad. They are still making lots of money.

-e

Hello;

A response to your “color”:
PRAA is comfortable with the debt to equity ratio and have been there before albeit at a lower overall debt load;

In the past borrowing occurred to acquire earning assets that could be
amortized to service the debt. This time nearly $500 mil. of the debt
has been used to acquire goodwill.

The potential hit from the regulation authority has been estimated (by J. Gilies) at around $35M and that was a loose estimate but still far from 1/4 billion

Is Gilies estimating the liability which may arise from the regulator
Consumer Financial Protection Bureau’s investigation of PRAA or the tax
liability should PRAA lose the court case?
3rd, even though there is a risk due to debt on their big acquisition, their earnings/share has risen with all that debt burden but with only a small amount of time for revenue and earnings due to the late in the year assimilation

For the first full quarter after the acquisition (Q4) eps increased to .93 from .91. hardly enough to pay for the increased leverage assumed
by shareholders? This was after a large tax owed to Norway for its currency appreciation against the Euro. This can come back the other way
someday but the ECB has barely commenced QE.

Best regards,

Mike