Sometimes the relationships between diverse businesses -- I'll resist using the shopworn word "synergies" -- is difficult to see. A clothing retailer can buy a ski maker in hopes of generating revenue from branding opportunities, but that's more wishful thinking than any real cohesive business strategy.
Yet a pawnshop operator expanding into payday loans, and then acquiring used car dealerships, requires a little more than a moment's thought to see the opportunities. Once you do, it becomes clear that such moves could put the company on a strong path to growth.
That's what First Cash Financial (NASDAQ:FCFS) has done, and now it's building a stronger place in the subprime lending and buying business as well. Second-quarter earnings show the results of that strategy. Revenue increased 64% to $93 million, while earnings climbed 35% to $0.27 per share. Same-store sales rose 11% in the quarter and are up 10% year to date.
The company's buy here/pay here used-car dealers generated $26 million in revenue in the quarter, up from $14 million the year before. First Cash has opened four new storefronts since November, accounting for $9 million of the increase, which means it still realized a roughly 21% increase from its existing stores.
That's one of the opportunities rivals are looking to cash in on as well. For example, Motley Fool Stock Advisor recommendation CompuCredit (NASDAQ:CCRT) primarily has provided credit cards to those at the lower end of the FICO range, but recently it bought a buy here/pay here used-car chain to complement its securitization of the receivables of such dealerships. Diversified financial services for those who don't have bank accounts, or are otherwise underserved, provide a rich opportunity, because these customers have long been neglected by traditional financial institutions.
Other companies like EZCORP (NASDAQ:EZPW) and Cash America (NYSE:CSH) have also been branching out into ancillary businesses.
The concern with payday lenders comes not from their business models, but from meddling by politicians and regulators. About a dozen states ban payday lending, and Congress has imposed an interest rate cap of 36% on such loans to members of the military. As a result, the country's largest payday lender, Advance America (NYSE:AEA), has stopped making loans to the military because it's no longer profitable to do so.
As the subprime mortgage market's collapse evolves, Congress will feel the need to flex its muscles and "do something," even in areas unrelated to mortgages. That could put a crimp in the results First Cash reports later on. While things look like they're heading for further earnings surprises -- First Cash's management reiterated full-year earnings guidance of $1.25 to $1.30 per share despite two strong quarters thus far -- next year may prove troublesome if a new crop of politicians puts its hand in the cookie jar.
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Fool contributor Rich Duprey owns shares of CompuCredit, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. Advance America is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.
