Pawn Lenders Looking More Like Kings

By Sean Ryan
November 9, 2009 | Comments (4)

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A confluence of trends looks ready to push pawn lenders higher. The declining availability of credit should spur more demand for pawn loans, and rising gold prices should make those loans more profitable.

Credit card lenders such as Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JP Morgan Chase (NYSE: JPM) have been slashing credit lines even for good customers, meaning consumers have less access to credit card loans.

There are also bills before both the House and Senate that would restrict banks' ability to charge overdraft fees; as a result, these bills would likely reduce the availability of overdraft protection -- effectively a form of short-term credit.

With banks offering consumers less credit, in a pinch more people will be forced to turn to non-banks, such as pawn lenders. The big players in this business are First Cash Financial Services (Nasdaq: FCFS), EZCORP (Nasdaq: EZPW), and Cash America (NYSE: CSH).

The increased volume should coincide with improved profitability, due to the high price of gold.

A big chunk of the business of pawn lenders comes in making loans on gold jewelry. With the price of gold elevated, the companies can safely lend more money against a given item, making transactions more profitable. Moreover, as gold prices rise, so does the value of the jewelry that isn't redeemed by borrowers; this gets melted down and sold.

One concern for these companies has been the future of the payday loan business, which accounts for around 30%-40% of net revenues at each of these companies. During the presidential campaign, President Obama's website stated that he supported a 36% interest rate cap, which would effectively eliminate the payday loan business.

However, the House Financial Services Committee has voted to create a Consumer Financial Protection Agency that would merely regulate the business. Also, if payday loans were eliminated, some of that business would likely go to pawn loans, meaning pawn lenders could gain business from payday-only companies such as QC Holdings (Nasdaq: QCCO).

The result is attractive earnings multiples relative to their growth prospects. Analysts expect all three companies to post 12%-16% EPS growth in 2010, yet their price/earnings ratios range from a low of 8.1 (EZCORP) to a high of 11.4 (First Cash).

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Fool contributor Sean Ryan does not own any of the stocks referenced in this article. The Fool's disclosure policy can be found here.

Comments from our Foolish Readers

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  • Report this Comment On November 09, 2009, at 5:26 PM, megabuc wrote:

    I heard Citibank may be converted to a pawn shop by the Fed. Citibank is so broke and PATHETIC THAT THE FED HAS CLOSED THEM DOWN........So long CITIBANK, IN 2009.

  • Report this Comment On November 10, 2009, at 8:11 AM, PocketPair wrote:

    Something you (and most other pundits) fail to recognize is that a 36% federal APR limit on all short-term credit would effectively eliminate the pawn industry, not just their payday lending business. Of course it would also eliminate all credit unions and community banks, so I think likelihood of it happening is slim.

  • Report this Comment On November 16, 2009, at 2:14 PM, whorunit wrote:

    A 36% federal APR will be beneficial to banks and credit unions. It will cause the average lender who needs only a couple hundred bucks to actually take out a much larger loan and extend the payment over a much longer time. The APR may be 36% but the consumer will have larger out of pocket costs IF they can even qualify for one of these loans to begin with. What is clear is that in the US there is a need for access to reasonable short term credit.

  • Report this Comment On November 18, 2009, at 1:55 PM, mostlynice wrote:

    Capping rates on these products which so many Americans rely on is bad. Rate caps on payday loans are intended to remove that option entirely from the market, leaving people high and dry who can not qualify for credit cards or other loans. Instead of nixing these options outright, better options will hit the market as more businesses compete for this demand.

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