Middle-market investment banking firm Piper Jaffray (NYSE:PJC) saw its shares open up 4.1% on Wednesday, as the company reported third-quarter net income of $9.79 per share, versus $0.79 per share for the year-ago quarter. The increase was primarily attributable to a one-time gain from the closing of the sale of its Private Client Services branch network during the period. Excluding the gain, net income from continuing operations fell by 12% compared to the 2005 third quarter. Revenue also dropped by 3%.

Despite the decreases in revenue and net income, there was a silver lining. The company topped analysts' estimates for their net income by 11%. Piper Jaffray's results also reflect an increase in net income from continuing operations of 20% over its 2006 second-quarter earnings. "We are pleased with our third-quarter financial results given the more challenging market conditions," said Chairman and CEO Andrew S. Duff.

Based on recent developments and the company's third-quarter results, I believe that this stock presents a good long-term investment opportunity for Fools. The $510 million in after-tax proceeds the company received from the sale of its Private Client Services business has been put to good use. In August, the company used $180 million to pay off subordinated debt. The firm also used the extra cash to complete a repurchase of $100 million of its common stock amounting to approximately 7% of its common shares outstanding. This repurchase is a positive signal for shareholders, since it indicates that management believes that the company's stock price is reasonably valued.

Two primary risks associated with this investment are room for future growth and the general state of the equity markets. The company is in an ultra-competitive market saturated with financial service firms such as Franklin Resources (NYSE:BEN), Brookfield Asset Management (NYSE:BAM), Friedman Billings Ramsey (NYSE:FBR), and the like. Whether Piper Jaffray can continue to experience the same degree of growth as quarters past is uncertain. The company experienced a record quarter of $34.5 million for advisory services revenue (a large component of its investment banking income) in its 2005 third quarter. With the bar set so high, its not surprising that the company saw its investment banking revenue drop 2% to $72.1 million from its year-ago quarter, and revenue from institutional sales and trading decreased by 10%. When put in perspective, these movements are not overly alarming; however, one should consider the prospect of a plateau in demand for the company's services, should the equity markets not continue along the path of their recent ascent.

Over the long term, I think these risks will be mitigated by the company's pricing power, diverse line of services, and commitment to expansion. Although advisory services revenue dropped by 26% when compared to the prior year's third quarter, the decline was offset by other areas. The other two components of Piper Jaffray's investment banking revenue, equity financing and fixed income underwriting, were both up significantly when compared to Q3 2005 and Q2 2006. Equity financing revenue was up 53% compared to the year-ago quarter and up 8% compared to the prior quarter. Fixed income underwriting revenue increased 20% compared to Q3 2005 and 21% from Q2 2006. The increases are primarily attributable to higher fees charged per transaction.

In terms of expansion, the company recently opened new offices in Charlotte, Madrid, and Shanghai. During the most recent quarter, the firm also entered into a strategic partnership with CITGroup (NYSE:CIT) to offer middle-market companies an expanded selection of financing options. The stock is up 23% since it announced the accelerated repurchase of its common stock in August. However, any profit-taking that might follow the most recent run-up (ignited by the company's Q3 results) could present an opportune entry point for Fools looking to add a prime financial services holding to their portfolio.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned.