Foolish Forecast: Advance America Still Advancing

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Payday-loan maker Advance America (NYSE: AEA) will report fourth-quarter 2006 financial results on Feb. 7.

What analysts say:

• Buy, sell, or waffle? Of the nine analysts covering Advance America, five say hold, three say buy, and one defaults with a sell.
• Revenues. Revenues are expected to jump to $187.4 million, a 43% increase over last year's $130.7 million.
• Earnings. Profits are expected to grow 15%, to $0.23 per share, with a 13% increase forecast for full-year results.

What management says:
Specializing in payday loans, Advance America has been able to insulate itself from some of the market vagaries competitors who also have exposure to pawn shops and other ancillary services have experienced. Cash America (NYSE: CSH), for example, recently reported it raised its loan loss provision to nearly $27 million, or more than 37% of cash advance fees, perhaps in expectation of higher defaults on loans granted over the Internet. Advance America saw its own provision for doubtful accounts rise to 22.7% of revenues in the third quarter from 21% the previous year.

The payday lender notes that its receivables tend to be seasonal and are lowest at the end of the first quarter, matching when people receive their income tax refunds, and highest at the end of the fourth quarter. So expect Advance America's receivables to be higher with this report.

What management does:
Advance America operates under what it calls its "standard business model" whereby it is the party responsible for qualifying borrowers, setting terms and conditions for loans, advancing money to approved borrowers, and assuming the risk of default. Previously, the company had often operated under what it called an "agency business model," whereby third-party lending institutions performed many of those functions. In 2005, changes in FDIC regulations precluded that from happening anymore, so all of Advance America's 2,745 centers operate under the standard business model. It is creating efficiencies for the payday lender, which are helping to boost the bottom line. Center gross profits, however, feel the pinch of new center openings, which tend to be more costly until they become established. In the third quarter, the company had opened 91 new stores.

Margin	09/05	12/05	03/06	06/06	09/06
Operating	19.0%	18.3%	18.5%	19.0%	19.4%
Net	9.8%	10.0%	9.9%	10.1%	10.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
This Motley Fool Inside Value selection has turned around its operations in an industry with an unseemly underbelly. Despite the public and vocal attacks on the payday business and Advance America in particular, the company has been performing remarkably well and is still valued at less than many of its competitors even though it is the largest of the payday lenders. With the lowest forward valuation, an increasing presence in this country, and a strong balance sheet, Advance America still seems a good buy at prices still 25% under the annual highs.

Competitors:

• EZCORP (Nasdaq: EZPW)
• First Cash Financial (Nasdaq: FCFS)
• Dollar Financial (Nasdaq: DLLR)
• QC Holdings (Nasdaq: QCCO)
• CompuCredit (Nasdaq: CCRT)

Related Foolishness:

• Previewing 2007: Advance America
• Year in Review: Advance America
• Foolish Fundamentals: Margins

Advance America has earned a four-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the stock rating service by joining today. It's free!

Advance America is also a recommendation of Motley Fool Inside Value. A 30-day guest pass let's you in on why payday loans can mean profits for investors.

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.