It's time to celebrate: After a long and winding search, I've finally found two small-cap stocks with big value and growth potential. Ironically, they turned up in my own backyard; I've written about both of these companies before. Both issue payday loans, and one also owns pawnshops.
Yes, I'm once again talking about First Cash Financial Services (NASDAQ:FCFS) and QC Holdings (NASDAQ:QCCO). In my opinion, their competitors EZ Corp (NASDAQ:EZPW), Cash America International (NYSE:CSH), Advance America (NYSE:AEA), ACE Cash Express (NASDAQ:AACE), and Dollar Financial Corporation (NASDAQ:DLLR) aren't in the same league, for reasons I've explained in other articles.
Here's another reason why I like these companies, particularly First Cash: After the FDIC suspiciously curtailed these companies' ability to lend in states like Texas, management found a brilliant way around those restrictions. I love a company that charges headlong into adversity and quickly solves a crisis. That's the kind of management I want to see running my business.
But just to make sure I'm on the right track, let's check out the numbers. Here's First Cash:
- Market cap under $2.5 billion? Yes, $360 million.
- Historical and projected earnings growth of 15%? 37% the past five years, 19% for the next five.
- Positive free cash flow? Yup, $34.5 million over the past 12 months.
- Market cap/FCF < P/E? Yes, that ratio comes in at a spectacularly low 0.61.
- MC/FCF/five-year growth rate < 0.66? Wonders never cease -- 0.54.
- Insider ownership of 10%-50%? Yes -- 24%, very solid.
- Net margins of 7% or more? Yes. An excellent 12.6%.
Not too shabby. As for QC Holdings:
- Market cap under $2.5 billion? Yes, $289.9 million.
- Historical and projected earnings growth of 15%? 37% the past five years, 19% for the next five.
- Positive free cash flow? Yes. $6.5 million for the last 12-month period for which cash flow data is available.
- Market cap/FCF < P/E? No, 44.6 compared to 17.
- Insider ownership of 10%-50%? More like 69%. But let's not call that bad.
- Net margins of 7% or more? Yup, 16.40%.
Why isn't free cash flow here as high as we might like? The company is aggressively expanding, but doing so without any debt, and still carrying $32 million of cash in the bank.
On top of all this, QC Holdings is buying back $10 million in stock, which would amount to about 4% of shares outstanding. In both companies' recent quarterly reports, you see confirmation of a trend in this sector: growth, in the form of outstanding same-store comps. How outstanding? Try 15% and higher. People are flocking to this product; despite what critics say, they seem to want it.
For good measure, I'd like to quickly examine dilution. Over the past two years, First Cash shares outstanding have increased at a rather ugly average rate of 7.9%. But diluted shares outstanding actually decreased by 7,000 shares in the course of fiscal 2004. Though this may a bit of a blip, dilution appears to be under control now.
As for QC Holdings, they're a bit harder to get a handle on, since they just went public last July. As of June 30, 2004, they had 12.924 million shares outstanding; one year later, they had 21.537 million. That's an annual rate of about 40%. Not great, but given all that debt-free expansion, I still think the company bears consideration.
Does this mean you should run out and buy these stocks? No! Do your own homework -- don't rely on my suggestions alone. Before I formally recommend these puppies to the folks at Motley Fool Hidden Gems, I plan to wait two quarters to see how the business is going to shake out. Although management has outmaneuvered the FDIC, I want to make certain they're able to execute on their business plan over a slightly longer period.
Further Foolishness on payday lenders:
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Fool contributor Lawrence Meyers does not own any stocks mentioned in this article, and advises you to meticulously research stocks on your own.
