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Investors in PRA Group, Inc. PRAA need to pay close attention to the stock based on moves in the options market lately. That is because the Dec 20, 2024 $2.50 Put had some of the highest implied volatility of all equity options today.
What is Implied Volatility?
Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell-off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.
What do the Analysts Think?
Clearly, options traders are pricing in a big move for PRA Group shares, but what is the fundamental picture for the company? Currently, PRA Group is a Zacks Rank #1 (Strong Buy) in the Financial - Miscellaneous Services industry that ranks in the Top 27% of our Zacks Industry Rank. Over the last 60 days, two analysts have increased their earnings estimates for the current quarter, while none have dropped their estimates. The net effect has taken our Zacks Consensus Estimate for the current quarter from earnings of 23 cents per share to 34 cents in that period.
Given the way analysts feel about PRA Group right now, this huge implied volatility could mean there’s a trade developing. Oftentimes, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.
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Zacks Investment Research
PRA Group, Inc. PRAA is well-poised to grow due to higher recent portfolio purchases and improved pricing in the United States, coupled with better overall cash collections. The company's adeptness in managing diverse debt types positions it strategically for effective portfolio diversification.
PRA Group is a global financial and business services company in the Americas, Australia and Europe, with a market cap of $797.4 million. The company specializes in the acquisition, collection and management of non-performing loans, constituting its core business activities.
In the past three months, PRA Group’s shares have gained 2% compared with the industry’s 7.6% growth. However, higher purchase volumes at favorable pricing should push the stock upward in the future.
PRAA Estimate Revisions Trend
The Zacks Consensus Estimate for PRA Group’s 2024 bottom line indicates an improvement of more than one-fold. Its 2024 EPS estimate has been revised upward over the past 60 days, reflecting positive analyst sentiment. The company beat earnings estimates in each of the last four quarters.
The consensus estimate for 2024 revenues is pegged at $1.1 billion, indicating a 33.8% rise year over year. The company’s performance is expected to improve in 2024 as it intends to make more profitable purchases, which will constitute a larger part of its portfolio.
PRAA’s Growth Prospects
PRA Group is expected to leverage improving portfolio supply and pricing in the United States amid ongoing credit normalization. This positive purchasing environment is a key factor contributing to the company's anticipated growth in the bottom line.
Moreover, rising industry credit card balances and higher charge-off and delinquency rates should fuel supply in the United States. Continued cash collection growth in its Europe business also bodes well. It expects cash collections to continue on its double-digit growth trajectory for the remainder of 2024.
In the second quarter, PRA Group made notable strides in its non-performing loan portfolio acquisitions, totaling $379.4 million. The company purchased portfolios worth $1.2 billion in 2023, up 36% year over year. Its focus on investments in boosting digital capabilities and technologies can play a major role in future performance.
With modernizing collections, the cash efficiency ratio is likely to grow. The company expects the cash efficiency ratio to be around 60% in 2024, up from 58% in 2023. Notably, its forward 12-month price-to-earnings ratio of 11.21X is lower than the industry average of 13.66X, indicating that the stock is more affordable. Courtesy of solid prospects, this Zacks Rank #1 (Strong Buy) stock is worth adding to your portfolio at the moment.
However, there are a few factors that can hold the stock back. Its total debt to total capital of 72.9% is much higher than the industry’s figure of 56.3%. Increased leverage is leading to higher interest expenses. Also, increasing legal collection costs and agency fees are denting margins. The metrics jumped 36.3% and 16.2% year over year, respectively, in the first half of 2024. However, we believe that a systematic and strategic plan of action will drive its long-term growth.
Other Stocks to Consider
Investors interested in the broader Finance space may look at some other top-ranked players like Aflac Incorporated AFL, Brown & Brown, Inc. BRO and Arthur J. Gallagher & Co. AJG. Each stock presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Aflac’s current-year earnings is pegged at $6.73 per share, which indicates 8% year-over-year growth. It witnessed seven upward estimate revisions in the past 30 days against no downward movement. AFL beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 8.2%.
The Zacks Consensus Estimate for Brown & Brown’s 2024 earnings indicates 31% year-over-year growth. During the past two months, BRO has witnessed six upward estimate revisions against none in the opposite direction. It beat earnings estimates in each of the past four quarters, with an average surprise of 9.8%.
The Zacks Consensus Estimate for Arthur J. Gallagher’s current-year earnings suggests a 16% year-over-year jump. During the past two months, AJG has witnessed six upward estimate revisions against none in the opposite direction. The consensus mark for current-year revenues indicates 14.5% growth from a year ago.
Zacks Investment Research
Globe Life Inc. GL shares have lost 16.7% in the year-to-date period against the industry’s 3.8% growth. It has also underperformed the Finance sector’s 12% return and the Zacks S&P 500 composite’s 15% growth in the said time frame.
Year-to-Date Price Performance
GL has been grappling with higher expenses over the past few years. Higher total policyholder benefits, amortization of deferred acquisition costs, commissions, premium taxes and non-deferred acquisition costs, other operating expenses and interest expenses resulted in escalating expenses.
Globe Life has been incurring high administrative expenses over the years. For 2024, GL expects administrative expenses to be approximately 7% of premiums, higher than the 2023 level.
Closing at $101.34 in the last trading session, the stock stands 23% below its 52-week high of $132.
Globe Life’s long-term debt has been increasing over the last few years with debt-to-capital ratio deteriorating. As of June 30, 2024, total debt increased 11% year over year. A high debt level has been inducing higher interest expenses, which also increased in the second quarter of 2024. The company must service its debt uninterruptedly, or else creditworthiness could be dented.
GL Trading Above 50-Day Moving Average
GL closed at $101.34 on Wednesday, above the 50-day simple moving average (SMA) of $93.43, representing an uptrend. SMA is a widely used technical analysis tool to predict future price trends by analyzing historical price data.
GL’s Growth Projection
The Zacks Consensus Estimate for Globe Life’s 2024 earnings per share indicates a year-over-year increase of 12%. The consensus estimate for revenues is pegged at $5.82 billion, implying a year-over-year improvement of 5.5%.
The consensus estimate for 2025 earnings per share and revenues indicates an increase of 10.6% and 4.7%, respectively, from the corresponding 2024 estimates.
Earnings of GL grew 12.4% in the last five years, better than the industry average of 5.5%.
Positive Analyst Sentiment Instills Confidence in GL
One of the six analysts covering the stock has raised estimates for 2024 while two analysts have raised estimates for 2025 over the past 30 days. The consensus estimate for 2024 and 2025 earnings indicates an improvement of 0.08% and 0.8%, respectively.
GL’s Return on Capital
GL’s trailing 12-month return on equity is 21.9%, ahead of the industry average of 20.9%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders.
Also, the return on invested capital (ROIC) in the trailing 12 months was 13.3%, better than the industry average of 4.6%. Its ROIC has been increasing over the last few quarters amid capital investment made over the same time frame. This reflects the company’s efficiency in utilizing funds to generate income.
Key Drivers of Globe Life
Globe Life has been witnessing a positive trend in revenues, driven by premium growth in its Life Insurance and Health Insurance segments and net investment income.
The strong performance of the American Income and Liberty National divisions should drive the top line in the future. Liberty National is likely to continue to benefit from improved productivity and agent count. GL’s expansion initiatives to capture heavily populated and less penetrated areas should drive growth in the future. Net life sales, as well as net health sales, are expected to grow in the mid-teens for Liberty National.
Moreover, net investment income continues to be another important driver of the company’s top-line growth and has been exhibiting improvement over the last few years. The metric is likely to keep growing, riding on improved invested assets and higher interest rates on new investments.
The company has maintained a strong liquidity position with sufficient cash-generation capabilities. Its operations comprise writing basic protection life and supplemental health insurance policies, which generate strong and stable cash flows. For 2024, Globe Life has targeted a consolidated Company Action Level RBC ratio of 300-320%.
A strong capital position enables Globe Life to enhance its shareholder value via share buybacks and dividend payouts. The insurer has continuously been increasing its dividend over the past eight years (2016-2023) at a CAGR of 6.79%.
GL Shares Are Affordable
Globe Life is trading at a discount compared with the industry average. It presents a compelling investment opportunity with its attractive forward 12-month price-to-book ratio of 7.91X, lower than the industry average of 13.54X. Also, it has a Value Score of A.
Shares of other players from the same space, such as Guild Holdings Company GHLD, Marex Group PLC MRX and PRA Group, Inc. PRAA, are also trading at a discount to the industry average.
Conclusion
While Globe Life witnesses higher expenses, its higher life and health sales, improved invested assets, increased productivity and agent count, strong liquidity position and effective capital deployment could pave the way for recovery and sustained growth. GL should benefit from Higher return on capital, favorable growth estimates and the affordability of the stock. It is, therefore, wise to hold on to this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
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