In the face of a changing legislative and regulatory environment, the payday-lending business and its joined-at-the-hip pawnshop industry have been performing surprisingly well. Most of the companies in the industry have appreciated more than 60% in price in the past year, compared with a 17% increase in the market. Despite the challenges, it's still a profitable business.

An example of that profitability is Cash America (NYSE:CSH), which primarily operates pawnshops but has been expanding out into the payday-lending business. It recently acquired online cash-advance operator CashNetUSA, a move that will broaden the pawn shop's presence. And last week's third-quarter earnings show that business continues to be brisk.

While you can see the full rundown in my Fool by Numbers, the strength of the quarter was essentially the result of the company's pawn-related business. Loans originating from its 474 bricks-and-mortar pawnshops, coupled with sales from merchandise put up as collateral, helped fuel a 15% increase in consolidated net revenue (total revenues minus the cost of merchandise sold for the quarter). Same-store net sales were up more than 7% compared with the year before, and pawn loans were up 9% to $129 million.

Pawn loans are a lucrative business; the annualized yield on them for the third quarter was 119.2%, a 60-basis-point increase from last year. Merchandise sales can be equally profitable. When a customer enters a Cash America pawn store, he or she turns over merchandise to be held as collateral in return for a cash loan. If the customer can't make the loan payment, Cash America gets to sell the merchandise, with profit margins currently running in excess of 38% on the proceeds from the sales. Management noted in its conference call that pawnshops added some 27% to Cash America's income from operations this quarter.

Yet that's not as much as some competitors are getting from their loans and sales. EZ Corp. (NASDAQ:EZPW) realized yields of 136% in the second quarter (it'll report third-quarter results next month) with gross margins of nearly 42% on merchandise sales, while First Cash Financial (NASDAQ:FCFS) rang up similar margins.

The cash-advance segment has been sluggish of late. Cash America had noted in the second quarter that volume had slowed, and while the gap has been narrowed this quarter, it's still behind for the year. Revenues from the segment, though, were up 28%, while operating income nearly quadrupled to $4.7 million. For the coming fiscal year, Cash America expects its core loan business to improve 8%-12% over 2006 as it adds 30 to 40 new units, split evenly between cash-advance centers and pawnshops.

Regardless of misguided attempts to legislate and regulate the industry out of business, Cash America and competitors such as Advance America (NYSE:AEA), Dollar Financial (NASDAQ:DLLR), and even the much smaller QC Holdings (NASDAQ:QCCO) continue to expand and profit. Online loan centers, used-car dealerships, and rechargeable lines of credit show that demand for these services comes from consumers whose credit may not be stellar but have been otherwise blocked by larger, more staid financial institutions from access to small loans that they need.

Cash America is not the priciest of the bunch, but it's not cheap, either, with a price-to-earnings ratio of 23 and an enterprise value-to-free cash flow multiple of 33. My enthusiasm for the both the company and the sector notwithstanding, I'd hold out for a better price before taking a position.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.