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Portfolio Recovery Associates Inc. (PRAA - Analyst Report) reported third-quarter income from continuing operations of $25.5 million or $1.48 per share, surpassing the Zacks Consensus Estimate of $1.47 and the prior-year earnings of $18.5 million or $1.08 per share.

Earnings were primarily driven by strong top-line growth attributable to continuous improvement in cash collections from both bankruptcy and core portfolios, partly offset by weak performance in the fee-for-service business.

Business Update

Portfolio Recovery’s total revenue in the reported quarter was $114.3 million, lagging the Zacks Consensus Estimate of $116.0 million. However, the result showed a 20% increase from $95.5 million in the year-ago period.

The boost in revenue was driven by a growth of 27% in cash receipts to $193.6 million from $152.9 million in the prior-year quarter. Portfolio Recovery applied 43.5% of its cash collections to reduce its owned debt portfolios, up from 41.8% in the year-ago quarter.

Cash collections jumped 33% year over year to $182.2 million from $137.4 million in the year-ago period. Call center and other collections posted a 24% increase, external legal collections gained 35%, internal legal collections grew 36% and purchased bankruptcy collections rose 40%, compared with the prior-year quarter.

However, Portfolio Recovery’s revenue from its fee-for-service businesses declined 27% to $11.4 million in the reported quarter, mainly due to decrease in revenue from PRA Location Services.

The amortization rate in the quarter included a $0.74 million net allowance charge against pools of finance receivables accounts.

Financial Update

During the reported quarter Portfolio Recovery spent $122.1 million on portfolio acquisitions to purchase $5.68 billion of debt. This debt was acquired in 95 portfolios from 12 different sellers to further improve collector productivity and strengthen the fee businesses.

As on September 30, 2011, cash balances were $30.0 million, down from $41.1 million as on December 31, 2010. During the reported quarter, Portfolio Recovery had net borrowings of $10 million on its line of credit, leaving it with $260 million in outstanding borrowings at quarter end. The remaining borrowing availability under the line was $147.5 million as on September 30, 2011.

Portfolio recovery exited the quarter with total assets of $1.06 billion and shareholders’ equity of $568.3 million.

Our Take

Portfolio Recovery’s bottom-line results have shown great improvement over the past few quarters. Strong cash collections coupled with improved operational efficiency led to an increase in both the top- and bottom-lines in the reported quarter.

Increase in cash collection also enabled the company to repay a substantial portion of its borrowings, thereby improving the debt-equity ratio. The company also benefited from the long-term investments made over the past several years. However, the revenue of the fee-for-service business has been spiraling downward over the past few quarters and the company needs to focus on improving the segment’s performance.

Portfolio Recovery’s competitor Asta Funding Inc. reported third quarter income of $3.34 million or 23 cents per share, beating the Zacks Consensus Estimate of 18 cents and prior-year earnings of 21 cents.

Currently, Portfolio Recovery carries a Zacks #4 Rank, implying a short-term Sell rating.

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