Advance America Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: You rarely see a 75% earnings increase prompt a 15% stock sell-off -- but that's exactly what Advance America (NYSE: AEA  ) shareholders got this morning.

So what: Management reported the surge last night after trading closed. Earnings reached $0.14 per share for the quarter, and $0.43 for the year to date. Revenue, however, fell slightly year over year, hurt by new laws in Colorado, Illinois, Virginia, Washington, and Wisconsin. AA also closed its shops in Arizona late last year, shutting off that revenue stream entirely.

Now what: That trend doesn't sound promising -- yet Advance America also reported that its operating cash is flowing better than ever. Rising 57% compared to the first half of 2010, AA's cash from operations is now on track to produce something like $130 million this year. With capital expenses minimal for this chain, I would not be surprised to learn that AA generated something like $125 million in free cash flow by the time 2011 draws to a close.

That's a price-to-free cash flow ratio of less than 4, for a business that most analysts on Wall Street believe capable of 15% long-term growth. I know payday lenders don't appeal to everyone, but if you're on the hunt for a cheap stock, I'd think twice before turning up your nose at Advance America.

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