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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