Expanding into the used-car business was supposed to provide an avenue of growth for First Cash Financial (Nasdaq: FCFS) without straying far enough from its payday loan business to constitute Lynchian diworsification.
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 (NYSE: AEA) and EZCORP (Nasdaq: EZPW), have been profiting handsomely by meeting that need. Yet as federal and state regulators clamp down on lending practices, limiting interest rates or banning payday loans altogether, the companies must look elsewhere to diversify their revenue streams.
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 (Nasdaq: DLLR) has done. It's also meant breaking into the used-car market. First Cash and CompuCredit (Nasdaq: CCRT), which typically provides credit cards to consumers at the low end of the FICO credit range, bought buy here/pay here dealerships. Each hoped to make a profit while establishing a new revenue source that lacked the stigma associated with payday loans.
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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