Check casher and payday lender Dollar Financial (NASDAQ:DLLR) has focused more on operations in foreign countries -- where its services are not so controversial -- so that two-thirds of its revenues are now derived from sources outside the U.S.
That move has allowed Dollar to insulate itself from the vagaries and sometimes rapaciousness of homegrown regulations while still benefiting from the profitability of the industry. However, only 10% of its revenues come from payday lending, while the rest is derived primarily from check-cashing services.
As a company with such a large international exposure, however, there are still many difficulties to face.
Challenges for 2007
- With currency exchange rates having an impact on a large percentage of pre-tax profits, a change for the worse in those rates could cause profits to swoon.
- Since most international customers have access to banks, and revenues are derived primarily from check-cashing services, technological advances that continue to eliminate checks (i.e., direct deposit and electronic funds transfers) could have an impact on the business.
- Economic slowdowns, both here and abroad, could cause fluctuations in demand for the company's services.
So far, Dollar Financial has been able to sidestep a lot of the landmines that have cropped up in the path of rivals like Advance America (NYSE:AEA), which has been the lightning rod for much of the ire directed against the payday lending industry, and First Cash Financial (NASDAQ:FCFS), which has sought to expand beyond payday lending and pawn shops, to open buy here-pay here used car dealerships.
Cashing in on growth opportunities
For a U.S.-based business with significant international holdings, Dollar Financial will always have to contend with the vagaries of foreign currency exchange rates. Yet it still has significant U.S. operations fully accounting for a third of revenues and, in the first fiscal quarter of 2007, saw comparable sales jump 17% over the same period last year. And while payday lending is seen as unsavory here, check cashing still makes up the bulk of services and, although still not holding a sterling image here, is far less controversial.
For whatever reason, whether it's a Luddite's fear of technology or simply trepidation of giving out personal financial information to unknown third parties, there are many people who prefer to receive a check to cash themselves rather than having it deposited directly into a bank account by their employer or government agency.
For the "unbanked" or underbanked in the U.S., checking cashing and related financial services are a necessary form of translating that check into cash. Internationally, check-cashing services are seen as an extension of traditional banking services, and although many customers abroad have checking accounts and access to banks and similar institutions, unlike many Americans, they have no squeamishness about using services such as those provided by Dollar Financial.
One Fool's perspective
The opportunity, therefore, lies in continuing its expansion into other corners of Europe. Dollar Financial has been making acquisitions of services in Ireland. And last month, it acquired a chain of 23 financial services stores in Florida. Domestic and international expansion will prove to be the key to growth for the company.
Dollar Financial was one of the industry's star performers, more than doubling in price so far this year. While that has given it a hefty premium on trailing earnings, it represents a still-low valuation for forward earnings.
Management has provided guidance of as much as $2 per share for 2007, which translates into a price-to-earnings ratio of under 14 -- below the industry average and bested only by Advance America.
With many of the same trends and demographics that propelled the check-cashing service forward in 2006 still providing a tailwind in 2007, there seems ample opportunity to see Dollar Financial ring the registers this year, too.
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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.
