If you read my recent column on First Cash Financial Services (NASDAQ:FCFS), then you know that the company offers check-cashing and short-term loan services with service fees of up to 40% annualized -- depending upon state regulations. Bill Mann recently explained that some companies charge a little more for their unsecured advances to customers. Investors who don't mind owning companies that take advantage of lower-income clients should have a look at ACE Cash Express (NASDAQ:AACE) as another play in this sector.
ACE Cash Express has more than 1,200 locations in 36 states, and in its most recent quarter increased year-over-year quarterly earnings per share by a staggering 32%, with an increase in comparable-store sales of 7.9%. By the end of fiscal 2005 (next June), the company expects earnings in the range of $1.94 to $2.00 per share, giving it an attractive forward P/E of just 14.
ACE also generates healthy, if not spectacular, free cash flow. It has twice as much cash as debt, and sports operating margins of 12.6% and net margins of 7.6%. Toss in an ROE above 15% and you see a business that is doing quite well for itself.
However, unlike First Cash, ACE Cash doesn't own any pawnshops. At first glance, that may not seem like a big deal. But when you realize First Cash's operating and net margins are 18.3% and 11.5%, respectively, the value of pawnshops should hit you right between the eyes. The reason for these higher margins is that pawnshops' annualized service charges can run as high as 240%, depending on the state. Also, when clients fail to repurchase their pawned items, First Cash's gross margins on the resale of forfeited collateral is a wallet-busting 45%.
ACE Cash has no reason to be ashamed of its business model. It's solidly profitable, and its margins are on par with competitors such as Cash America International (NYSE:CSH) and shareholder-unfriendlyEZ Corp Inc. (NASDAQ:EZPW). Given that both ACE Cash and First Cash experienced higher same-store comps, there's clearly plenty of room for both in this fragmented industry. But there is something to be said for diversification: Should there ever be legislation that limits check-cashing and short-term loan fees, ACE may find itself pawning a few items of its own.
Fool Contributor Lawrence Meyers owns shares of First Cash and ACE Cash.
