Expanding into the used-car business was supposed to provide an avenue of growth for First Cash Financial
Pawn shops, payday loans, and buy here/pay here used-car lots often cater to a common pool of customers with less-than-spotless credit, perhaps without a checking account, and with a need for basic financial services -- microloans, for example -- that traditional banks can't or won't provide.
First Cash and other payday lenders, such as Advance America
For some, like First Cash and EZCORP, that's meant expanding operations south of the border to Mexico or north into Canada, or across the pond to Great Britain, as Dollar Financial
Yet for First Cash Financial, the used-car market is proving tough to crack. Blaming a deteriorating economy and adverse weather conditions, the payday lender reported a 41% drop in earnings in the fourth quarter, as its Auto Master used-car division tallied a 12% decline in same-store sales. That alone reduced the entire company's profits by $0.17 per share.
Those lackluster numbers should serve as a bit of a warning to CompuCredit investors, who are awaiting next month's earnings report. Shares in the credit card company have plummeted 72% from its highs last May, and fallen by about half since November, as delinquencies trended upward. With a used-car dealership of its own now, CompuCredit's losses could be bigger than anticipated, assuming First Cash's woes aren't company-specific.
First Cash shares fell more than 30% yesterday on the earnings news. That puts its earnings multiple at a discount to most others in its industry, on both a trailing and forward basis. With long-term growth expected to surpass that of most of its rivals, its PEG ratio is a minuscule 0.38, meaning that the market may have overreacted in selling off its shares.
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First Cash Financial is a recommendation of Motley Fool Hidden Gems Pay Dirt. CompuCredit was recommended by Stock Advisor. Advance America is an Inside Value pick. Sample any of the Fool's newsletters with a free 30-day trial subscription.
Fool contributor Rich Duprey owns shares of EZCORP and CompuCredit, but he does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.