The Motley Fool: Payday Loan Companies Are Popular Stock Pick in 2007
By Paul RizzoPayday Loan Writer
Not that being a pawn broker is a dying industry, but making short-term cash advances - commonly referred to as payday loans - just happens to be more profitable.
So states an article by The Motel Fool, an online financial publication.
It’s the reason why companies that operated primarily (even wholly) as pawn brokers just a few years ago, such as like Cash America and EZ Corp, are now moving more broadly into making payday loans.
Yet those profits have also drawn the attention of regulators and industry critics, which has caused a backlash to develop and have them seek to limit payday cash advance lenders, if not drive them out of business altogether.
Challenges for 2007
Cash America was once predominantly an operator of a slew of pawn shops that accouned for more than 93% of revenues as late as 2003. Steadily, though, as the profit potential of payday loans became more apparent, the company began branching out and opening a series of stores that catered to the same “unbanked” consumer population.
By 2005, pawn operations had accounted for just 81% of revenues, and in the third fiscal quarter of 2006, it had dropped to 76% of revenues.
But even as Cash America was making that transition, the regulatory playing field was changing. The FDIC essentially put the typical online payday loan lending business model out of business, requiring many operators to operate as “credit services” companies.
State regulators also prompted action, and many lenders had to close up shop in states like North Carolina, Georgia, and Pennsylvania.
Pawn brokers are heavily dependent upon the price of gold, since jewelry happens to be the merchandise most often pawned for a cash advance. While Cash America has to pay a higher price to the customer to acquire the merchandise when gold is high, it’s also able to sell the jewelry at higher prices, increasing its profit margins.
Yet the price of gold has eased back lately, which could impact the company’s profits.
Payday loans that click
To spread its risk out more evenly in the market, Cash America is having fast cash advance services account for more of its revenues. While it’s not giving up on being a pawn broker, there are opportunities to advance its profits further by reaching more of the target consumer who might never walk into a pawn shop, but who aren’t as reluctant to frequent a payday loan center.
Even so, being able to acquire cheap payday loans anonymously without having to physically enter a brick-and-mortar office also holds an attraction to leery consumers. Cash America has acquired CashNetUSA, a privately held online payday lender with customers in 27 states, for $35 million.
The transaction, completed in September, was immediately accretive to earnings and allowed the pawn broker to raise guidance for 2006 and 2007.
There are a number of other private online lenders catering to the unbanked and under-banked consumer, but even though it was founded just two years ago, CashNetUSA finds itself already profitable. With the marketing capabilities of Cash America now supporting it, the company is expecting earnings growth for the next year of 32% over 2006.
