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Portfolio Recovery Associates Inc. (PRAA - Analyst Report) reported third-quarter 2012 income from continuing operations of $1.96 per share, surpassing the Zacks Consensus Estimate of $1.85. The results also exceeded the prior-year earnings of $1.48.

In the quarter under review, the company’s net income came in at $33.3 million, up 31% from $25.5 million recorded in the third quarter of 2011. Earnings were primarily driven by strong top-line growth attributable to continuous improvement in cash collections.

Portfolio Recovery’s total revenue in the reported quarter was $150.5 million, soaring 32% from $114.3 million in the year-ago period.  Revenue also exceeded the Zacks Consensus Estimate of $146 million.

The boost in revenue was driven by an improvement of 26% in cash receipts to $243.8 million from $193.6 million in the prior-year quarter. Cash collections also jumped 26% year over year to $229.1 million from $182.2 million. Call center and other collections posted a 13% increase, external legal collections gained 47%, internal legal collections surged 56% and purchased bankruptcy collections expanded 22%, compared with the prior-year quarter.

However, Portfolio Recovery’s revenue from its fee income was $14.8 million, up from $11.4 million in the year-ago quarter. The increase was mainly due to the revenues from the UK business.

Operating expenses also surged 33% year over year to $93.5 million, while operating income spurred 30% to $57.1 million. As a result, operating margin declined 50 basis points year over year to 37.9% in the quarter under review.

Balance Sheet and Capital Structure

As of September 30, 2012, Portfolio Recovery’s cash and cash equivalents increased to $31.5 million from $26.7 million recorded at the end of 2011.

The company had $250 million outstanding under its line of credit as of September 30, 2012. The remaining borrowing availability under the line was $214.5 million as of September 30, 2012.

Portfolio recovery exited the quarter with total assets of $1.17 billion and shareholders’ equity of $670.5 million.

Our Take

Portfolio Recovery’s bottom-line results have shown steady 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.

Even the fee income showed an upward movement in the second and third quarters of 2012, after posting a series of weak results. The balance sheet also strengthened with higher cash balance and increased shareholders’ equity.

Portfolio Recovery’s competitor Encore Capital Group Inc. (ECPG - Snapshot Report) will report its third-quarter financial results after the market closes on November 1, 2012.

Portfolio Recovery carries a Zacks #3 Rank (short-term Hold) indicating no clear directional pressure on the shares over the near term.

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