If you're looking for investments that will thrive in this recession, ignore the dollar stores, deep-discount retailers, and low-cost grocery chains. Sure, they'll do well -- just look at how Family Dollar (NYSE: FDO ) , Wal-Mart (NYSE: WMT ) , and Kroger (NYSE: KR ) have performed lately. But for even better performance, look no further than your neighborhood pawn shop.
When times are tough, those in need will hock what they can at their local pawnbroker, while consumers seeking decent goods at cheap prices will check out the merchandise on sale. Since many storefronts will also cash your check or advance you a short-term loan, they're quickly becoming the preferred one-stop financial-service shops for the unbanked and underbanked.
Two of the leading pawn shop operators reported earnings recently, and their results indicate that when the chips are down, their stocks will be up. EZCORP (Nasdaq: EZPW ) and First Cash Financial (Nasdaq: FCFS ) both benefit from the lack of credit available at traditional financial institutions.
EZCORP saw pawn-services fees jump 15% in the quarter, while merchandise sales rose 10%. First quarter profits also surged 18% over the year-ago period. Pawn shop revenue, which accounts for nearly three-quarters of its total, should become an even more important component considering its recent acquisitions, pushing full-year earnings projections ahead of analyst expectations.
First Cash Financial had similar results, with a 27% increase in merchandise sales. It also expects pawn operations to provide as much as 80% of its revenue in the coming year.
Both companies are broadly expanding their pawn operations south of the border. First Cash ended the year with 250 stores in Mexico, while acquiring another 16-store chain of pawn shops there. EZCORP, with more than 40 stores in Mexico right now, expects to add an additional 30-35 shops there in the coming year. And why not? Operating income grew by more than 120% in the quarter; even if you include currency fluctuations, it was still up by 87% over last year.
Cash-advance operations continue to assume a smaller portion of these pawn shop operators' revenue as time goes on. Although the new administration may have some plans to cap rates on the payday loan business, such measures will have less and less effect on operations.
Contrast that with Cash America (NYSE: CSH ) , for example, which derives almost half of its revenue from such services. It forecast a 15% decline in profits this quarter, adding that full-year earnings would be much lower as a result of reduced cash advance revenue. Advance America (NYSE: AEA ) has found itself under assault on many fronts, determining that new laws make New Hampshire another state in which it can't offer its payday loans.
If investors are looking for recessionary resiliency, they should check out what pawn shops have on display. My favorite is EZCORP; at nine times next year's earnings, it's valued more cheaply than First Cash Financial, without the same risks as the payday lenders.
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