It is an open secret that the new generation is impatient and seeks instant gratification, which traditional banking products like bank loans and checking accounts are not satisfying. Coupled with a general distrust of mainstream financial institutions after the Global Financial Crisis, this has resulted in an increasing proportion of unbanked and underbanked consumers.
First Cash Financial Services, Inc. (NASDAQ:FCFS) is the best proxy for the growth in pawnshops to capitalize on consumers’ need for access to instant cash or credit. However, the market is efficient and has rewarded First Cash with premium valuations relative to its peers. Investors are advised to wait for a better entry price.
The next best alternative to banks
Close to 28% of U.S. households are either unbanked or underbanked, according to a September 2012 Federal Deposit Insurance Corporation National Survey. The proportion of unbanked and underbanked households is expected to be even higher in Mexico. Even among those with bank accounts or credit cards, pawnshops offer several advantages over banks and other traditional lenders.
Firstly, pawnshops offer consumers with almost immediate access to cash, as long as they have items available for sale. Comparatively, a bank loan typically involves more paperwork and a longer processing time.
Secondly, if one eventually defaults on a bank loan, he has to deal with pesky debt collectors and get his credit history marred with a few scars.
Last, but not least, some of the pawnshops’ customers are not even on the banks’ radar, because they are unbanked or the loan quantum is considered uneconomical (too small for banks’ appetites).
Less exposure to investor concerns
The dynamics in Mexico and the U.S. are quite different. Significantly more customers in Mexico are pawning non-jewelry items such as electronics and other general merchandise items, with non-jewelry items making up more than 80% of pawn collateral. In contrast, less than 40% of pawn collateral comprises of non-jewelry items in the U.S.
According its most recent 10-K, jewelry items accounted for 43% of First Cash Financial Services, Inc. (NASDAQ:FCFS)’s pawn collateral at the end of fiscal 2012. This ratio is expected to decrease even further going forward, as First Cash opens more pawnshops in Mexico. First Cash Financial Services, Inc. (NASDAQ:FCFS) already generates more than half of its revenue from Mexico now.
In view of tightening payday loans regulations, the outlook for payday loans is dim. First Cash will be less affected than its peers in the event of any adverse regulatory actions, given that less than 10% of its revenue is derived from U.S. consumer loans. In the past few years, First Cash Financial Services, Inc. (NASDAQ:FCFS) has been moving towards a more pawn-focused strategy, evidenced by significant closures of its payday loans operations.
Peer comparison
First Cash’s peers include Cash America International, Inc. (NYSE:CSH) and EZCORP Inc (NASDAQ:EZPW)
EZCORP has made much headway with its efforts to reduce its reliance on the U.S. market in recent years. While it used to derive significantly all of its revenue domestically, foreign markets, including Latin America, were responsible for close to a quarter of EZCORP’s fiscal 2012 revenue. In terms of business segments, consumer loans accounted for about 20% of EZCORP Inc (NASDAQ:EZPW)’s fiscal 2012 sales, exposing it to the adverse impact from any tightening payday loans regulations. In contrast, First Cash Financial Services, Inc. (NASDAQ:FCFS) has seen its efforts to reduce payday loans operations in recent years pay off, with consumer loans now representing less than one-tenth of its revenue.
Cash America International, Inc. (NYSE:CSH) is no longer a good proxy for the pawnshop industry, although it is one of the largest pawnshop operators with EZCORP. It has shifted its focus to online consumer loans, with this segment accounting for about 37% of its revenue in fiscal 2012. The growth in Cash America’s online consumer loans business is based on several secular trends such as the increasing amount of e-commerce activity and more people conducting their investment, billing, and banking activities online.
First Cash Financial Services, Inc. (NASDAQ:FCFS) trades at a significant premium to its peers with a forward P/E of 14.5. In contrast, Cash America and EZCORP are valued by the market at 8.2 and 6.5 times forward P/E. However, First Cash also delivered a higher ROA of 18.3%, compared with ROAs of 9%-10% for Cash America and EZCORP.
Conclusion
The market has rightfully accorded higher valuations to First Cash, which is the next best alternative to banks and less exposure to investor concerns. However, First Cash is not cheap with a PEG of 0.96, close to a ratio of 1 which Peter Lynch will deem as fairly reasonable valuations.
The article Capitalize on the Age of Immediacy With This Stock originally appeared on Fool.com and is written by Mark Lin.
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