Payday Advance Company Delves into Used Car Business, Watches Stock Prices Increase
By J.J. CameronPayday Loan Writer
Despite regulations on payday loans in numerous states across the country, a handful of payday advance companies are watching stock shares soar.
One reason why? They're expanding their business models.
For some, this simply includes taking successful payday loan technology and techniques to markets overseas. For others, such as First Cash Financial Services, it means changing gears a bit into a wholly new world; in this case, that of used cars.
The Arlington, Texas, company, which provides short-term, high-interest quick cash loans to people who otherwise couldn't get credit, paid $34 million for Auto Master, a privately held Arkansas car dealer with eight "buy here/pay here" locations in Arkansas, Missouri and Oklahoma.
Auto Master is expected to boost First Cash's earnings by the fourth quarter, prompting the company to revise its 2006 earnings estimates higher to 96 cents to 97 cents a share from earlier guidance of 94 cents to 95 cents.
Auto Master uses a similar model as First Cash, which has rolled up small operations to grow to about 380 stores that offer short-term paycheck advances, check-cashing and other credit services. It also has a 50% share of Cash & Go Ltd., a joint venture that owns and operates 40 check-cashing and financial-services kiosks located inside convenience stores.
"We believe that projected population growth trends in the South and Southwest, especially among 'unbanked' or 'under-banked' consumers, should continue to create long-term demand for affordable used vehicles and financing, as well as opportunities for expansion into other markets where First Cash operates," First Cash Chief Executive Rick Wessel said.
Payday loan stock analysis: Any company offering financial services to the lower end of the income spectrum will see plenty of demand in an era of $3 a gallon gas prices, rising mortgage rates and higher housing costs, but investors have already bought into that story pretty heavily, and sold off just as strongly.
First Cash and competitors such as Cash America, EZCorp., and Dollar Financial had sizable run-ups in the first half of the year and subsequently sold off as investors figured valuations had peaked, says Dan Fannon, an analyst at Jefferies & Co.
"We've seen this group come in a bit," he says. "These stocks have done well in the current environment. And while certainly you're going to see an accretion in demand for these types of loans and services, you're also going to see an increase in default rates."
Therefore, any addition to First Cash's revenue stream is a welcome development in the wake of the state-by-state legal shift that forced many subprime lenders to move out of short term payday loans and adopt a less profitable loan model, says Richard Eckert, an analyst with Roth Capital Partners.
"We view this transaction very positively," he wrote in a research note published Monday. "We had become increasingly concerned [about] competitive and regulatory pressures in the company's payday lending segment, a large driver of growth over the past five to six years."
New state regulations, particularly in Texas, where First Cash has 118 of its 198 domestic locations, cut into its payday loan business, and a move into the subprime auto segment should offset some of that curtailed growth.
Here's a look at how the stock for this payday loan company has improved as a result:
- Share price as of Friday's close: $17.74
- Share price now: $19.23
- Percent change: 8.4%
- Volume: 881,175 shares, daily average 312,60
