Critics of payday lenders have it all wrong. They're not preying on the defenseless, but providing customers with services they want, need, and can't get anywhere else. That explains why the industry's largest payday lender, Advance America (NYSE:AEA), was able to record yet another consecutive quarter of revenue growth -- its type of financial service is in demand.
Profits for Advance America grew 9% to $22.3 million on revenues of $168 million, surpassing analysts' sales forecasts. Earnings matched expectations as the financial-services company expanded its number of stores open and entered Utah, its 37th state, giving it the widest national footprint of its industry.
Even as the company weathers legal and regulatory assaults, its industry continues to grow. Cash America (NYSE:CSH) was flush with cash, EZCORP (NASDAQ:EZPW) added 29 new storefronts, and even rent-to-own industry leader Rent-a-Center (NASDAQ:RCII) has gotten into the business, adding payday loans and cash advance services to its rental business. Obviously, there's more than enough business to go around.
Not that there aren't pitfalls and dangers, too. The subprime mortgage woes seem generally contained to that industry, having failed to wrap their tentacles too tightly around the payday lenders, as had been expected. Advance America did report that its provision for loan losses climbed to 9.4% of revenues, from 7.9% reported last year. As the housing crisis worsened, you could see such signs creeping up in the rising amount of chargeoffs Advance America was reporting. That figure rose 10% last year to $110 million.
Yet the Motley Fool Inside Value recommendation's provisions remain below competitors. Cash America's provision for loan losses was 14% of revenues, while EZCORP's provisions were 19% of the payday loan fees it collected. First Cash Financial (NASDAQ:FCFS) had provisions of 15% of revenues. One could argue that Advance America actually needs to increase its reserves, considering the size of its operations.
Strong demand, coupled with an expansive market presence, translates easily into greater growth and profits. That's exactly what has industry critics concerned. If the payday lenders continue to succeed, they will spread their numbers, causing more individuals to use their services -- thus perpetuating the cycle. Of course, they may have confused cause and effect.
For investors, though, Advance America still seems to be selling at a discount to historical values. With a strong balance sheet, the ability to generate significant amounts of free cash flow, a nearly singleminded focus on its primary business of payday lending, and various valuations that lag those of its competition, it looks like Advance America has plenty of room for advancement.
Advance America and Rent-a-Center are recommendations of Motley Fool Inside Value. A 30-day trial subscription gives you more top-shelf stocks trading at bargain-basement prices. Click here to start your risk-free trial today.
Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
