Pawnshop. Payday lender. Used car dealer. When dealing with the "underbanked," a group of people either without traditional checking and savings accounts, or for whom banks have chosen not to make lending services available, these three avenues represent arenas in which a company can operate at a profitable advantage.

First Cash Financial (NASDAQ:FCFS) has chosen to give itself a third means of reaching this often neglected group of consumers. Whereas competitors Cash America (NYSE:CSH) and EZ Corp (NASDAQ:EZPW) have chosen to diversify from their primary pawnshop origins into payday lending, and Advance America (NYSE:AEA) and Dollar Financial (NASDAQ:DLLR) have chosen to remain wholly payday lenders -- one primarily domestic, the other international -- First Cash Financial is the first to branch out into a unique third niche that ought to let it continue its growth trajectory.

Challenges for 2007
While the used car dealerships represent potential, they're a very local phenomenon for First Cash. The dealerships are pretty much centered on Arkansas, with a few in Missouri and Oklahoma. And there are only eight of them. So even though earnings from them should be immediately accretive to current year financials, expansion plans will go slowly, with only a handful of new dealerships planned.

As with all pawnshop operators, their success in generating revenues and profits is highly correlated with the price of gold. First Cash Financial, like EZ Corp and Cash America, have benefited from gold's sustained lofty heights. When gold is high, the prices at which merchandise pawned by consumers and not reclaimed -- which more often than not is jewelry -- are able to be higher priced, offset by the somewhat higher prices they must pay the customer bringing in the merchandise. A decline in the price of gold will see a concurrent decline in revenues and margins from that portion of the business.

And payday lending remains under assault as usurious from its critics. It's a very profitable business, and default rates have been reduced not only by First Cash but by the other lenders as well, but a significant downturn in the economy could lead to an increase in defaults and cause First Cash Financial to experience higher losses.

Industry consultant BearingPoint estimates that the underbanked market includes 28 million people without a "transaction account" or a credit score. Including immigrants would add an additional 11 million people to the universe of potential customers. An additional 45 million people with a bank account but a low FICO score gives a market of some 84 million people to service -- people who spend some $10.9 billion in alternative financial services.

While access to traditional banking services from untraditional sources remains the top use of companies in the market, other areas include consumer and auto loans, mortgages, insurance, and even investment products.

First Cash Financial is one of the first large players that has taken on alternative avenues of reaching this large pool of customers. There's a lot of overhead involved in the used car market, and carrying an inventory of vehicles may provide a drag on earnings for the year as it expands, even though the company said it expects to generate earnings 29% to 34% high than in 2006. First Cash forecasts per-share profits in the range $1.25 to $1.30, earnings that are at the upper end of its previous guidance.

Foolish final thoughts
Considering its current valuation, that represents a forward looking price-to-earnings ratio of 16.6, putting it firmly in the middle of the other payday lenders.


Fwd PE

Advance America



First Cash



EZ Corp






Cash America



Dollar Financial



*Unusually high because of nonrecurring expenses.

Although it appreciated some 49% in 2006, this Fool thinks there's still room to grow considering the possibilities First Cash has before it. Players in Motley Fool CAPS, the new collective investor intelligence community, seem to agree, giving it a 5-star rating and expecting it to outperform the market in the future. Expect First Cash Financial to continue to drive home profits for investors.

Drive off with these related Foolish articles:

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Advance America is a recommendation of Motley Fool Inside Value. Drive on over with a30-day guest passthat will rev your engines on the market-beating selections.

Time is running out for the 2006 Foolanthropy charity drive. Take a look at the five great charities chosen for this year's event, and click the links from there to make a donation today. Thanks for your support.

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.