Sector Watch: Specialty consumer finance

Lisa Springer | Sep 12, 2007 6:22am EDT | 1 Comment

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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.

Plans also call for the opening of 40 new EZMONEY stores in this year’s fourth quarter, increasing the 2007 total to 100 new EZMONEY locations. On August 16 the company announced plans to acquire a network of 20 Mexican pawnshops, an action that will significantly expand its footprint in Mexico.

Analysts expect this company to produce 25% growth next year and 18% annual longer-term growth. These shares are trading at a 15 P/E. My $20 price target is nearly 70% above the recent share price.

EZCORP closed at $11.99 on Tuesday. The 52-week range is $10.06 to $17.59.

First Cash Financial Services also owns pawn shops and stand-alone cash advance stores, and is building a network of used car dealerships offering buy-here/pay-here financing.

Buy-here/pay-here car dealerships target customers who lack bank accounts, or who have no credit history or past credit problems. These dealerships generally charge higher interest rates on car loans but offer more flexible underwriting terms and weekly or bi-weekly payment schedules that coincide with the customer’s payday. They also provide customers with the option of making payments in person, an important feature for those lacking a checking account.

At June 30, 2007, this company operated 448 lending locations, one buy-here/pay-here car dealership and 38 joint venture loan kiosks providing check cashing services. First Cash Financial’s year-to-date revenues grew to $183 million in the first six months of 2007, up 63% from $112 million in the same period last year, while same-store sales grew 10% year-over-year. The company opened 43 new stores in the first six months of 2007.

Year-to-date per share earnings were $0.58, up 35% compared with per share earnings of $0.43 for the same period one year ago. The June quarter marked First Cash Financial’s 26th consecutive quarter of double-digit growth. The company is forecasting 29% to 34% earnings gains for full-year 2007 and plans to open a total of at least 75 new pawnshops and cash advance stores, and three to five buy-here/pay-here car dealerships this year.

Analysts expect this company to generate 18% annual growth over the next five years. First Cash Financial shares currently trade at a 17 P/E. My $30 price target for this company represents a 35% premium to the current share price.

First Cash Financial on Tuesday closed at $21.62. The 52-week high is $26.47; the low is $19.29.

About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience. Read More