Sector Watch: Specialty consumer finance

Two of the biggest players in the so-called specialty consumer finance segment are small caps EZCORP, Inc. (Nasdaq: EZPW) and First Cash Financial Services, Inc. (Nasdaq: FCFS). Many Americans are living paycheck to paycheck, and a new lending segment, specialty consumer finance, has evolved to meet the needs of this group of customers. Americans with no savings and bad credit ratings have few choices when they need to borrow money. Most are forced to rely on the services of specialty consumer lenders. These lenders generally offer more flexible underwriting and payment terms but charge higher interest rates and fees.  

Cash advance, which entails borrowing against a future paycheck, is the largest specialty finance segment. The number of cash advance stores nationwide grew to 24,000 last year and is forecast to nearly double to 40,000 locations over the next decade. Pawnshops are another familiar specialty lending segment. There are approximately 15,000 pawnshops across the United States, most of which are owned by mom-and-pop operators. Because this market is very fragmented, opportunities exist for a large player to consolidate the market through acquisitions.

EZCORP offers non-recourse loans collateralized by personal property (pawn loans) and also sells merchandise forfeited from its pawn lending operations. The company also owns a network of cash advance locations that provide short-term, non-collateralized loans (payday loans) and fee-based credit services to customers seeking loans (signature loans).

At June 30, 2007, EZCORP was providing pawn loans at 295 U.S. and three Mexican EZPAWN locations and payday loans at 390 EZMONEY and 80 EZPAWN locations. In the nine months ended June 30, EZCORP’s revenues grew 17% year-over-year to $268 million and net earnings jumped 33% to $26.7 million, or $0.62 per share, from $20.1 million, or $0.48 per share, in the same period one year ago. The company’s management is forecasting a 28% increase in full-year 2007 earnings.

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