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Takeaway: PRA's weak quarter is only the beginning of it's downturn, says Financials analyst Josh Steiner. We still see "significant downside."

A Nasty Day For Debt Collector PRA Group (Another Solid Short Call By Josh Steiner) $PRAA - praa

Today hasn’t exactly been a happy day for investors long debt collector PRA Group (PRAA). After the company missed first quarter earnings estimates by a wide margin, shares plummeted over -18%. Ugly? Of course. But this barely scratches the surface of PRAA’s underlying issues.

To be clear, our Financials analyst Josh Steiner has been advising our customers to short PRAA. Since adding it to his team's Best Ideas Short list in November, shares are down almost 30%.

Here’s an excerpt from an update on PRAA via an institutional research note written by Steiner:

“PRA Group (PRAA) reported 1Q 2016 earnings after the close last night. The company missed revenue expectations by -6%, reporting $225 million versus expectations for $240 million, and adjusted EPS of $0.85 fell -11% short of expectations for $0.96. GAAP EPS, meanwhile, was $0.69, 28% below expectations.”

 

It’s also important to note, as Steiner continues, “Operating margin has fallen by a massive -770 bps from 39.2% in 1Q15 to 31.5% in 1Q16.”

Another highlight that caught our Financials team’s attention, since the broader issue is on the SEC’s radar, was the widening disparity between PRAA’s GAAP and non-GAAP earnings:

The last 9 months have seen GAAP earnings of $1.91, while non-GAAP earnings have been $2.87 (50% higher!). We think the buyside and sell-side may be slowly waking up to the fact that GAAP numbers are the better gauge of how PRA is performing. It's also remarkable how in the last 9 quarters, not once have Non-GAAP earnings been lower than GAAP earnings.”

Other important issues to watch include further deterioration in major company metrics, regulatory scrutiny, allowance charges and IRS-related tax troubles. In other words…

Not good.

Bottom Line: “Given the numerous aforementioned headwinds, we believe this quarter’s broad deterioration in PRAA’s metrics is only the beginning of the company’s downturn. We continue to see significant downside to PRAA’s stock price.”

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Editor’s Note: To access our institutional research email sales@hedgeye.com.