As the payday loan industry's leader in terms of market cap and revenues, Advance America (NYSE: AEA) has attracted the ire of regulators and consumer activists in a number of states. While the regulators have failed to force the industry into retreat, they have been able to affect its operations.
Advance America reported yesterday that earnings rose 13.5% and revenues were up 3.4%. Excluding those states where the industry is under assault -- Arkansas, Illinois, Indiana, and Pennsylvania -- revenues were actually up 11% for the third quarter.
Yet even in Pennsylvania, where the company had to launch a new product, Advance America regained its previous profitability. The legislative and regulatory changes were only a small speed bump for Advance America, and the innovative product with which the company responded to the new laws apparently angered state officials, who responded by suing the company.
The legislative hurdles are also apparently causing Advance America to change the nature of its business. It nominally competes against companies like EZ Corp (Nasdaq: EZPW), but that business is actually a pawnshop loaning money on secured assets the borrower puts up as collateral. Advance America is essentially a straightforward payday lender, loaning small amounts of money (usually less than $1,000) to borrowers for short periods of time (usually around two weeks, or until the borrower's next paycheck, hence the industry name). But the company is now expanding into new areas.
As mentioned above, Advance America's new product in Pennsylvania offers borrowers a line of credit in exchange for a monthly participation fee of approximately $15 per $100 borrowed. Third-quarter revenues earned in Pennsylvania and Arkansas were $2.7 million less than those realized in 2005, and were down $16.6 million for the first nine months of the fiscal year, but profits returned to the same level.
The small-loan maker will also be launching a prepaid debit card in 2,200 centers in the fourth quarter, which should enable it to reach new customers and increase revenues. So while payday lending is still its primary focus -- and primary source of revenues -- external forces are forcing Advance America to become more innovative, changing the ways it helps borrowers meet short-term needs.
Despite the challenges, revenues rose to $178.6 million. The company has been able to buy back $65 million worth of stock while paying its eighth consecutive dividend of $0.11 per share.
When Philip Durell picked Advance America for his Motley Fool Inside Value newsletter last October, he recognized that it was a leader in a profitable industry that had been unnecessarily beaten back because of changes in federal law. Even though it has advanced 13% since then, it has slightly lagged the market, because its preeminent position has brought it into the crosshairs of lawmakers and rivals targeting the industry. It trades at the lowest valuations of its competitors, like First Cash Financial (Nasdaq: FCFS), Cash America (NYSE: CSH), Dollar Financial (Nasdaq: DLLR), and QC Holdings (Nasdaq: QCCO).
Considering its valuation, its leadership position, and its ability to innovate and respond to changing market and regulatory initiatives, Advance America looks like a long-term answer to a short-term, transitory hurdle.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
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