Is pawnshop operator First Cash Financial (NASDAQ:FCFS) first in its class? While that may seem akin to asking who the top student is at a reform school -- it's a distinction without meaning -- the reality is that pawnshop operators are profitable investments that remain hidden because of their unsavory reputation.
When Motley Fool Inside Value chief analyst Philip Durell chose similarly situated payday lender Advance America (NYSE:AEA) as one of his two recommendations last October, he noted the controversial nature of the industry as one of the risks inherent in an investment. Yet the company has advanced more than 11% since then, compared to a 7% increase by the market. And I noted back in April that the whole sector has been one marked for growth, rising on average nearly 75% over a six-month period, despite the regulatory hurdles it faces.
That apparently was the high point for the industry. It has gone flat since, rising only a little more than 1%, with Dollar Financial (NASDAQ:DLLR) being the leader of the pack. In fact, First Cash was the big loser, falling more than 7% over that time frame. And things were actually worse before yesterday, when the company jumped more than 8% on the news that it had bought a car dealership.
A pawnshop owning a car dealer? While initially it might not seem a natural fit, Auto Master was a privately held chain of eight "buy here/pay here" dealerships where car buyers with bad credit could drive away in the used car of their choice. After a small down payment, car loans are repaid on a weekly or biweekly payment schedule. Financing vehicle sales to the subprime market is actually a logical extension of the pawnshop/payday lending business in which First Cash excels. Moreover, with the FDIC and various states clamping down on various aspects of the payday lending business, the car dealerships are seen as a necessary diversification. First Cash plans on opening another three to five dealerships by the end of 2007.
Even in the challenging economic climate in which payday lenders find themselves, they are still seeing profit potential rise. First Cash noted in its Auto Master acquisition that it should be able to garner a larger share of the market through better-coordinated advertising and inventory selection. It believes the acquisition will increase earnings in the fourth quarter and raised guidance to $0.96-$0.97 per share, up from prior estimates of $0.94-$0.95. EZ Corp (NASDAQ:EZPW) also raised guidance to $1.90 per share as its third-quarter revenues, which ended June 30, rose 31% over last year. Cash America (NYSE:CSH), another payday lender, said profits in its second quarter (which also ended in June) increased 58% from a year ago.
First Cash Financial still trades at a premium to most of its competitors on a forward basis, along with QC Holdings (NASDAQ:QCCO) and ACE Cash Express (NASDAQ:AACE), undoubtedly in recognition of its strong balance sheet and industry-leading position. Even though it will take on some debt to finance the acquisition, First Cash still looks like it's at the head of its class.
Learn about payday lenders with these related Foolish articles:
Advance America is a recommendation of Motley Fool Inside Value. Want to hit paydirt with other value plays? Check out all the recommendations with a 30-day guest pass.
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.
