PRA Group: Assessing the Margin of Safety in a Restructured Debt Business

At its core, PRA Group is a cash-generating business built on a simple, durable model: buying delinquent debt at a discount and collecting on it. The intrinsic value of this enterprise is the discounted present value of its future cash flows. That value is anchored in a record Estimated Remaining Collections (ERC) of $8.6 billion, representing the total principal still owed on the portfolios it owns. This is not a fleeting metric; it is the bedrock of the company's future earnings power.

The strategic pivot to the U.S. legal channel is the key to building a scalable and efficient moat. This channel, which management has invested heavily in, grew 28% last year to $483 million and now accounts for 48% of U.S. core cash collections. This expansion is not just about volume; it's about creating a more predictable and higher-margin collection stream. By systematically improving this channel, PRA is moving from a fragmented, reactive model to one with a more controlled and repeatable process, widening its competitive advantage.

It is critical to separate the operational story from the accounting noise. The full-year net loss of $305 million was driven by a non-cash goodwill impairment charge of $413 million. This is a balance sheet adjustment, not a sign of operational failure. The underlying business, stripped of this one-time item, generated adjusted net income of $73 million. This distinction is fundamental for a value investor. We are assessing the durability of the cash-generating machine, not the volatility of reported earnings.

The company's focus on owner earnings is clear. It achieved record cash collections of $2.1 billion and record revenue of $1.2 billion in 2025. More importantly, its adjusted cash efficiency improved to 61%, meaning a higher percentage of each dollar collected flows to the bottom line. This efficiency, coupled with disciplined capital allocation-buying portfolios at multiples that aim for attractive net returns-shows a management team focused on compounding intrinsic value over the long cycle. The business is not just surviving; it is systematically building a wider moat.