Can someone explain to me why PRAA's stock is a good buy? Management prowess aside...the current P/E multiple implies an aggressive growth rate. Back of the envelope...a business worth approx. $360 million would have to earn approx. $55 million per year in perpetuity to justify the valuation assuming a required rate of return of 15% (simple math). In the first quarter PRAA earned $4.5 million (annualizing this run rate = $18.0 million). Now assuming PRAA earns this in perpetuity it is worth $120 million at a 15% discount rate. Now how does PRAA plan on getting from a run rate valuation of $120 million to a $360 million valuation? Simple answer - grow earning by more than 3X...by purchasing more than 3X under their current model of doing business...
Now let's examine the growth strategy in the context of management prowess...
(1) Management is too smart to go on a buying rampage to justify the current stock valuation (my assumption). They have seen a long history of failures doing just that: CFS, Credit Trusts, recently OSIPM, etc.
(2) High growth would require a more aggressive capital structure in the face of a cyclical industry...not necessarily a smart move...plain vanilla financing in moderation has been management's credo
(3) Others (on this bulletin board) have also noticed that larger portfolios (e.g., the Sears portfolio) are too large for PRAA - I would agree...Too few eggs
I foresee two possible outcomes...
(1) PRAA maintains discipline and opportunistically purchases small to medium size portfolios at rate that doesn't support the current valuation (my bet)
(2) PRAA attempts to ramp up aggressively and makes poor investment decisions
Either way the company will not support the current stock valuation and the stock price will come down...of course irrational exuberance still abounds...it may take time...
As for me�I took management�s lead...get out while the �getting is good"...actually I shorted the stock after the 6% run up today...I could be wrong...I'd love to hear feedback
Admittedly 15% is a swag, but what is your long-term required rate of return for this company? Based on information the 10K/10Q, you can easily back into 17%-20% cash-on-cash IRR for purchases in the years reported (take the gross collections to date plus management's estimate of remaining collections and apply an average cost to collect, say 40%). More directly stated, management (through its disclosures) estimates that purchases will yield unlevered returns in excess of 15% - if this is the case, why would I require less than 15%...especially if mgmt has the possibility of using leverage at some point in time?
Keep in mind, I am talking about the long-term required rate of return (afterall, I am using the formula for a perpetuity) - it would not be smart to assume current interest rates persist forever (my opinion). Historically, what has been the average equity return over the last 50 years? Moreover, do you view this growth strategy (with all of its risk) less risky than the average stock?
I don't think 15% is too rich...of course this is just me...
As I said, the main gola of the underwriter (especially of the secondary) is to let the big boys get out with a profit.
By giving them a buy-in price at $25.50, this almost guarantees a profit. So, how can 3.5 million shares be dumped into the market with such a small float? They need to keep the price up for until the main boys are out.
So far, we had less than 2 million shares traded. I would wait until another 2 million go through before I expect the stock to start heading back down to the $25 level or so.
I am not bashing any company, but this is how wall street works.