Is DFC Global Corp Poised for Growth?

"I actually made the joke that morning, 'You know, one of these days I might open one of these envelopes and the Holy Grail's going to fall out,'" -- Rick Harrison of Pawn Stars

Most days, pawn shops buy, sell, and pawn the usual gun, guitar, or gold bracelet. However, it's not every day a 2001 NFL Super Bowl ring walks it way into your life -- as it did for Mr. Harrison.

However, while Super Bowl rings are nice, for investors, the Holy Grail is a company poised for growth!

Today, we'll look into recently beaten-down alternative financial service provider DFC Global Corp  (NASDAQ: DLLR  )  and decide if it fits the mold for massive growth by asking:

  1. How does the business operate?
  2. How do its loans compare to competitors?
  3. Why might the stock price have fallen?

So, let's break out the annual reports and see if we can look beyond the rough exterior to uncover the hidden gem underneath -- and determine if DFC Global Corp is primed for a turnaround. 

Where the money is
As of DFC Global Corp's most recent annual report, the company has 1,507 locations in Europe, Canada, and the United States, though 50% of total revenue by geography streams from the United Kingdom and Republic of Ireland.

While DFC Global Corp makes money in a number of ways, 65% of revenue is generated through short-term unsecured loans -- 38% and 27% from retail and e-commerce channels, respectively.

This is actually quite different than U.S. competitors EZCORP (NASDAQ: EZPW  ) and Cash America (NYSE: CSH  ) . Of Cash America's $1 billion dollars in revenue in 2012, 61% was generated though merchandise sales, while EZCORP split its approximately $1 billion in total revenue more evenly between sales and loans.

What's in a loan?
DFC Global makes unsecured short-term consumer loans, meaning the company bears the entire risk on the $500 or less average principal loan. However, it collects a huge percentage on what it loans -- collecting $13-$34 per $100 lent.

On the other hand, companies like EZCORP and Cash America make more pawn loans. This means there's collateral covering risk.

In fact, when comparing the two types of loans -- unsecured versus pawn loans -- DFC Global depends on customers repaying loans, while EZCORP will generally lend at 25%-65% of collaterals resale value. This makes nonperforming loans, perhaps, just as valuable as performing loans.

Why the big drop?
DFC Global's stock price has fallen nearly 28% over the past year. For which the company believes new restrictions regarding loaning practices has had an adverse affect on business.

"Consequently, we have experienced higher loan defaults in our U.K. business during the second half of the fiscal year." -- Chairman and Chief Executive Officer Jeff Weiss. 

Defaulting loans are bad, sure, but this isn't a problem without a solution. The company will need make smarter loans! And that's exactly what it plans to do, cutting loan originations at least through the first half of 2014. 

Mr. Weiss went on to say:

Furthermore, the Company expects to be at a continuing competitive disadvantage in the United Kingdom until all industry providers are required to operate consistently under the new regulatory framework.

Investing in the future
Ultimately, companies like EZCORP and Cash America do a much better job protecting against risk, and therefore, could be much safer bets moving forward.

However, there may be some silver lining for DFC Global:

Over the long-term, we expect sustained growth and an opportunity to expand the Company's market share to materialize in the United Kingdom, as we believe some of our competitors will naturally struggle to operate under the new restrictive regulatory framework and exit the market.

This will be worth keeping an eye on, if new regulations are strictly enforced, DFC Global may not have to light the world on fire in the next year or two, just out-survive competitors.

Regulations may resolve by 2015, so an investor with an appetite for risk, and the stomach to weather a storm could strike gold with this turn-around candidate. 

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