Considering their growth over the past decade or so, so-called payday lenders are providing a much-needed service by lending customers small amounts of money -- often as little as $50 and sometimes as much as $3,000 -- for a brief period . usually until the customer gets his or her next paycheck.
Yet the industry is under attack from many quarters, both at the state and federal level, and from banking interests who don't like the competition. Deriding the fees charged for their services as usury, banks neglect to mention the usurious nature of their own fees for ATM usage, bounced checks, or insufficient funds. The assault, however, is taking its toll, and it's starting to show up on the payday lenders' financial statements.
The industry's largest lender, Motley Fool Inside Value selection Advance America (NYSE:AEA), reported revenues and earnings on Thursday that were an improvement over last year but fell far short of the market's estimates. As a result, the lender's stock took more than a 25% hammering by the market's close.
Advance America reported revenues of $155.9 million, up nearly 4% from the $150.3 million in the same quarter the year before. Profits were also up to $12.9 million from $10.7 last year, with diluted earnings per share coming in at $0.16 a stub. Yet that was well below the $0.21 a share analysts had been expecting.
This company operates primarily as a typical payday lender, referring to those services as its "standard business model," where state regulations allow such businesses to operate. In states that impose regulatory hurdles too high to clear, Advance America operates what it calls its "agency business model," in which it markets payday cash-advance services for state-chartered banks.
Until this year, it had operated in 37 states, only four of which required agency models. Yet new laws passed in Arkansas, Pennsylvania, and North Carolina caused the company to cease payday cash advance services in those states, and the effects showed up in this quarter's results. Two other states, Indiana and Illinois, passed new regulations that the company supported, but in the interim, both moves negatively affected revenues to the tune of $4.3 million for the quarter.
Despite protests from both banking regulators and self-styled consumer advocates, Advance America resumed operations in Pennsylvania in June by offering customers a $500 line of credit for a monthly participation fee, plus interest on outstanding loan balances, and in Arkansas, the company is operating as a check-cashing service.
While other competitors such as First Cash Financial (NASDAQ:FCFS) and Cash America (NYSE:CSH) recently reported record revenues and earnings, they also operate primarily as pawnshops, and that's where they derive most of their money. Their cash-advance services are far more limited than Advance America's are: First Cash has only 113 stores in 11 states, and Cash America operates nearly 300 stores in just six states. And though Dollar Financial (NASDAQ:DLLR) also operates in 36 states, it has about half the stores of Advance America and derives equal amounts of revenue from payday lending and check-cashing services.
It seems to this Fool the swipe at Advance America -- which took $378 million from its market cap -- is a little overwrought. The company's standard business model is still operating soundly. Excluding the states where regulatory excess set the company back, revenues increased more than 17% over last year. Though the stores that the company closed represented just 5% of its total operations, they did reduce by $72 million Advance America's $630 million total revenues last year. However, it's brought back nearly all of those stores under a different business model and are expected to return to their prior levels of service.
This is not to say the company still doesn't face difficulties. Both Pennsylvania and Arkansas are sure to press ahead in trying to close the "loopholes" that allowed the company to reorganize, but their efforts may be offset by the return to profitability in Illinois and Indiana. Other states, such as New Mexico and Arizona, meanwhile, are pushing for more restrictive payday-lending regulations.
Just as the market did when it chopped Advance America's stock in half after the passage of new FDIC regulations last year, only to see the stock march higher again, I think the latest haircut gives investors another opportunity to buy into this stock at an attractive valuation and still enjoy a respectable dividend yield.
Value these related Foolish articles:
- Can Prejudice Harm a Stock?
- Advance America, Half Price!
- Can Payday Lenders Survive
- First Cash Cashing In
Advance America is a recommendation of Motley Fool Inside Value. A 30-day guest pass is like getting a payday advance -- without the fees! Check out all of Philip Durell's market-beating picks.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
