KBW’s Eric Hagen, CFA, Reports That PRA’s 2Q Collections Performance is Tracking Stronger Than Prior Outlook

PRAA provided an update that global cash collections for April and May were tracking 24% better than their assumptions at quarter-end. We expect the outperformance could offer a modest incremental EPS benefit in 2Q. Combined portfolio purchases in April and May were $100.3 million, down 50% Y/Y on a run-rate basis. We think the stronger collections reinforce the broader trend we’re seeing that consumers are still relatively liquid right now.

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Key Points

• Strength in realized cash collections so far in 2Q should be incrementally supportive for this quarter’s GAAP earnings, all else equal. The company noted global collections in April and May were up 24% versus their quarter-end (Covid-adjusted) collection estimates. Realized collections are up 2% versus their projections even after stripping out the negative impact from Covid, which we think is positive. See a summary of the company’s update below. We think the strength materializing this quarter should help offset some of the net allowance charge of $12.8 million ($0.28/share) the company took on its back-book in 1Q, which included $20 million due to Covid (see our 1Q earnings wrap).
• We view PRAA’s strong realized collections as another data point supporting the general trend that the fall-off in consumer cash flow doesn’t appear as severe as many anticipated might be the case at the end of March. Similar trends have been echoed by other stocks in our coverage, which have noted that many borrowers who have opted for forbearance are still able to support making full or partial payments on mortgage and other installment/card debt. We think the stimulus package has been a meaningful enabler of that. Another round of Federal stimulus directed largely at consumers would be positive for the recovery stocks from the standpoint that it should support earnings on the back-book, but the creation of new supply of charged-off receivables hitting the market could be somewhat delayed.
• The company noted new purchases were $100.3 million for April and May, including $86.5 million concentrated in the U.S. That compares to $289.1 million purchased globally in all of 2Q19, and so we now expect purchases this quarter will likely be around $150 million, versus our last published estimate of $250 million following 1Q results. We think the “forgone” revenue from the $100 million delta versus our estimate for new purchases in 2Q can be easily offset by further improvements in collections on the back-book.
• Even though the company’s portfolio replenishment rate is dropping slightly over the near-term due to fewer new purchases, we believe purchasing less during the pandemic was an active decision. We also think that’s a prudent move if it ends up putting the company in a stronger and more flexible capital position down the road to acquire even more attractive and potentially higher-yielding pools.
• We think the read-through is also a near-term positive for ECPG. See our comp sheet for the U.S. recovery stocks on page 3. We remain Outperform on both PRAA and ECPG.

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