Cash America Clicks With Payday Loans

With state legislatures and the federal government cracking down on the payday-loan industry, such lenders are coming up with new, creative ways to extend their business. Last month, First Cash Financial (Nasdaq: FCFS) acquired a chain of used-car dealerships. Now Cash America (NYSE: CSH) is extending its reach online by completing the purchase of CashNetUSA, a privately held online payday lender.

Numerous payday lenders operate online, including PayDay OK, Sonic Cash, National Payday, and Payday Advance USA. Although their operations are similar to those of the bricks-and-mortar establishments, a benefit of the online presence is the face-saving anonymity of an Internet transaction. People who might dread walking into a Cash America storefront when they're short of cash might not have the same hesitation to do so online.

Cash America is paying $35 million for the online operation, which currently has $22 million in gross cash advances. Five additional compensation payments could be paid, should the acquisition add more to Cash Advance's earnings than originally estimated. Right now, the company estimates that the acquisition will bring in an additional $0.04 to $0.05 per share for the current year, primarily in the fourth quarter, and it has raised full-year guidance to a range between $1.89 and $1.98 a share. Fiscal 2007 earnings are projected to rise by as much as 28%, to $2.55 a share.

Cash America derives revenues from three sources: pawn loans, cash advances, and check cashing. All three have a similarly unsavory reputation, but they generate cash that any investor would want to sink his or her teeth into. The company's free cash flow (operating cash flow minus capital expenditures) has grown at a rate of 65% for the past four years, and net income has grown in excess of 30% annually. Thick profit margins also leave a cushiony feeling, with gross margins hovering in the area of 62% and net margins around 8% or so.

The CashNetUSA acquisition, originally announced back in July, should help pad those margins, too. CashNetUSA charges a fee as high as $25 per $100 borrowed (depending on the borrower's state of residence), one of the highest rates among the online lenders, though several others charge similarly high fees. On a typical two-week loan, that would be equal to a 651% APR. However, the company fully, clearly, and easily discloses the relevant fees and APRs. It also lists where it's licensed to do business, which is not everywhere -- it primarily makes loans in 27 Midwestern and Western states, while the East is severely underrepresented. Yet it is one of the few online lenders that has gone through the arduous process of getting licensed state by state.

The online loan maker has only been in existence for two years, but it is already profitable, and Cash America expects the company to be accretive to earnings right away. Cash America also believes that online payday loans are the fastest-growing segment of the industry, and while CashNetUSA is not the largest player in the field, it is a fast-growing one itself. The $22 million in gross cash advances made as of June 30 is up nearly threefold from the $8 million in advances made in the same period last year.

Payday lenders like First Cash Financial, Advance America (NYSE: AEA), Dollar Financial (Nasdaq: DLLR), and EZ Corp. (Nasdaq: EZPW) have had a strong run over the past year, with most stocks jumping 50% or more. Despite a pullback in the wake of new regulations emanating from the FDIC, that could have been viewed as an opportunity to acquire more shares. Today they're a little bit more pricey.

The Internet has revolutionized a number of industries. It appears that it will now be extending its reach to giving you a little extra cash to tide you over.

Advance America is a recommendation of Motley Fool Inside Value . Extend your reach with a 30-day guest pass to check out all the value picks that are currently beating the market by nearly five percentage points.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.