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Portfolio Recovery Associates Inc. (PRAA - Analyst Report) reported third-quarter 2013 income from continuing operations of $1.02 per share, surpassing the Zacks Consensus Estimate of 88 cents per share. The results also exceeded the prior-year earnings of 65 cents per share.

Earnings were primarily driven by a surge in revenues, which was attributable to the continuous improvement in income from finance receivables. Renewed emphasis on the fee-for-service businesses also aided the third quarter upside.

In the quarter under review, Portfolio Recovery’s net income came in at $47.3 million or 93 cents per share, up from $33.3 million or 65 cents per share recorded in the third quarter of 2012.

Portfolio Recovery’s total revenue in the reported quarter was $197.8 million, soaring 31% from the year-ago revenues. Revenues also exceeded the Zacks Consensus Estimate of $185 million.

The boost in revenues was driven by an improvement of 30% in cash receipts to $318 million from $243.8 million in the year-ago quarter. Cash collections from finance receivables also jumped 27% year over year to $291.7 million from $229.1 million. Call center and other collections posted a 23.6% increase to $89.5 million, external legal collections increased 20.9% to $48.3 million, internal legal collections surged 29.8% to $33.3 million and bankruptcy court trustee collections increased 32.4% to $120.6 million, compared with the prior-year quarter.

Additionally, Portfolio Recovery’s revenues from its finance receivables income were $171.5 million, up 26.3% from $135.8 million in the year-ago quarter. Fee income increased 78% to $26.3 million from $14.8 million due to a single, large Claims Compensation Bureau case, thereby aiding Portfolio Recovery’s bottom-line results.

Operating expenses surged 26.6% year over year to $118.3 million, while operating income also increased 39.3% to $79.5 million. As a result, operating margin increased to 40.2% from the year-ago quarter level of 37.9%.

Balance Sheet and Capital Structure

As of Sep 30, 2013, Portfolio Recovery’s cash and cash equivalents increased to $108.7 million from $32.7 million recorded as of Dec 31, 2012. The company had $217.0 million outstanding under its line of credit as of Sep 30, 2013.

Portfolio Recovery exited the reported quarter with total assets of $1.5 billion, increasing from $1.29 billion as of Dec 31, 2012. Shareholder equity stood at $816.6 million as of Sep 30, 2013, compared with $708.4 million as of Dec 31, 2012.

Stock Split

The 3:1 stock split that was announced in Jun 2013 went into effect on Aug 1, 2013. The stock split was structured as a stock dividend, to be paid to shareholders of record as of Jul 1, 2013. This is the first stock split being implemented by the company, which went public in 2002.

Notes Update

On Aug 14, 2013, Portfolio Recovery issued a 3.00% private placement of convertible senior notes due 2020 worth $250 million. The net proceeds from the issuance were used temporarily to repay the outstanding debt under the company’s revolving credit facility and to repurchase shares worth $50 million. The remaining proceeds were held in cash equivalent balances at the end of the third quarter of 2013. This resulted in a sequential surge in the cash and cash equivalents.

Our Take

Portfolio Recovery’s bottom-line results have shown steady improvement over the past few quarters. Strong cash collections drove revenues upward, while an increase in operating income drove operating margin higher.

The better-than-expected results represent Portfolio Recovery’s focus on capitalizing on its competitive advantages in a promising debt buying and collections marketplace. Further, tough demand shocks in the debt buying market have led to the exodus of competitors from the market. This benefited Portfolio Recovery in gaining market share and make investments in new portfolios of debt during the first nine months of 2013.  

Higher cash balance, total assets and shareholder equity strengthened the balance sheet as well. After reporting a decline since the beginning of the year, fee income improved substantially during the third quarter, banking on the Claims Compensation Bureau case. Overall, the third-quarter results were exceptionally good.

Others

The Western Union Company (WU - Analyst Report) reported third-quarter 2013 operating earnings of 39 cents per share, 4 cents ahead of the Zacks Consensus Estimate of 35 cents.

Euronet Worldwide Inc. (EEFT - Snapshot Report) reported third-quarter operating net income of 51 cents per share, beating the Zacks Consensus Estimate of 48 cents by 6.3%.

MoneyGram International Inc. (MGI - Analyst Report) reported third-quarter 2013 earnings per share of 31 cents, missing the Zacks Consensus Estimate by a penny.

Zacks Rank

Portfolio Recovery carries a Zacks Rank #2 (Buy).

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