Considering the problems besetting the subprime-mortgage industry, you can be forgiven if you thought that anyone who catered to subprime borrowers might be equally at risk.
With lenders going bankrupt, homebuilders writing off huge swaths of inventory, and fears of the ooze seeping out into the rest of the economy, it would seem natural to assume that lenders who deal with the highest-risk customers -- the pawnshops, payday lenders, and other institutions who serve the unbanked and underbanked -- would be particularly vulnerable.
Yet as pawnshop operator and payday lender First Cash Financial (NASDAQ:FCFS) has shown, that assumption would be flat-out wrong.
Revenue for this "diversified financial services" company soared 62% to $90 million on the strength of an 18% increase in pawnshop revenues, handily beating analyst forecasts. Although still a small component of First Cash's operations, its storefronts in Mexico saw a 26% increase in revenues, which underscores the opportunity south of the border and justifies the company's further expansion down there. Equally noteworthy was the 21% increase in service charge revenues First Cash received from its cash advance segment. Cash advance and third-party credit services loans increased 30% to $15.9 million.
Moreover, the newest addition to First Cash Financial's "diversity" was its chain of AutoMaster buy here/pay here used car dealerships, which added $24 million to the top line, a 60% jump from before they were acquired. First Cash also added four new dealerships since November.
As the housing crisis has unfolded, Wall Street has apparently taken a wait-and-see attitude toward anyone associated with subprime borrowers. Since the beginning of the year, when the reality about mortgage lending really seemed to sink in, the stocks of First Cash, EZCORP (NASDAQ:EZPW), CompuCredit (NASDAQ:CCRT), and Cash America (NYSE:CSH) have been weak and are generally below where they stood on January 1.
Sure, there have been a few standouts, like Advance America (NYSE:AEA). And even Dollar Financial (NASDAQ:DLLR) has inched forward, but there is a queasiness involved here.
The general perception of pawnshops and cash advance customers is skewed. Popular opinion may want to think of First Cash's customers dwelling on skid row, but in reality, the Community Financial Services Association of America -- an industry trade group -- says the typical payday loan borrower has an annual income between $25,000 and $50,000 and takes out seven loans a year, on average. EZCORP has found that its typical Texas customer has an annual income between $60,000 and $70,000 and borrows the maximum $1,500 limit. Not exactly a bum looking for a handout.
If you bought into the stereotypes, you've likely missed on some excellent returns over the years. While the S&P 500 has returned about 36% over the past five years, First Cash Financial, for example, has risen by more than 600% over that same period. With the results in, First Cash is a little pricier than it was beforehand, but it's been carrying a premium to competitors for a while now. Despite that, fellow Fool Tom Taulli has identified First Cash as his favorite financial stock for 2007. With management refusing to raise forecasts in light of the superior performance, this might just mean that Wall Street will be surprised yet again.
Advance America is a recommendation of Motley Fool Inside Value. CompuCredit is a recommendation of Motley Fool Stock Advisor. Borrow our 30-day risk-free guest pass and see why these caterers to the so-called subprime market will give investors a payday in the future.
Fool contributor Rich Duprey owns shares of CompuCredit, but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
