Cash America: Up 16% on Higher Guidance

Yesterday, Cash America (CSH), the leading pawn retailer and one of the leading cash advance merchants, dramatically raised its Q2 2008 guidance sending the stock up 16%.

[Cash America] expects second quarter 2008 earnings per share to be between 51 cents and 54 cents. The Company’s updated expectation for the second quarter of 2008 is now between 62 cents and 64 cents per share, up over 44% from 43 cents per share earned in the second quarter of 2007. Cash America will release complete second quarter results on July 24, 2008 before the market opens.

This is the second quarter in a row that during the quarter CSH has increased its guidance. On March 24, 2008 CSH raised its EPS guidance to $.80 - 82 from $.70 – 75 then exceeded that updated guidance on April 24 with actual EPS of $.86. Cash America’s business is really running on almost all cylinders.

Revenue from pawn loans and increased gross profit dollars on the sale of merchandise exceeded expectations… [while the] online cash advance product offering experienced strong revenue growth and lower than expected loan losses.

Regulatory Risk

The only cylinder potentially misfiring is due to regulation risks of its cash advance business. This caused the company to reduce full year 2008 EPS guidance by 15 cents and consider closing 139 stores. The regulatory risks warrant caution however several prominent 3^rd parties, including the New York Fed and Yale, have released major studies demonstrating the positive effects of CSH’s type of short term lending.

Online Short-Term Financing Platform

Cash America has a strong, growing online cash advance platform. This platform offers short-term cash advances over the Internet to customers in 32 states and in the UK. The online platform, which was acquired in September 2006, has spent years getting various regulatory approvals and tweaking its proprietary lending models. Recently the president of the Internet Services division purchased 57,400 shares of CSH.

Crossover of Retail Customers

The current consumer lead recession has driven many sub-prime lenders from the market. This has caused many new marginal borrowers to seek financing from Cash America. In addition, many traditional retail customers are crossing over from traditional retail to pre-owned merchandise. Cash America offers a smooth transition for many customers with its strongly branded safe, clean stores easing the migration of new customers. The pre-owned merchandise offered by CSH allows consumers to stretch their limited dollars. For example, it is common for jewelry to be priced 35-40% below traditional retail outlets.

Solid Management & Growth

CSH’s seasoned management has a history of being conservative and open with shareholders. The company’s growth is high quality coming from its brick and mortar stores’ organic growth (not by opening new stores) and through the company’s online platform. Even after yesterday’s run-up Cash America has a P/E around 12 based on its current 2008 full year guidance which now appears extremely conservative. Below I’ve included a summary of Cash America’s Q1 2008 results to provide a better understanding of Cash America’s business and results.

Q1 2008 Results (April 24, 2008)

Revenue: $250.9M up 13%

• Pawn segment: $170.3M up 14%
  • Includes finance and service charges on pawn loans and proceeds from sale of merchandise
• Cash Advance segment: $79.6M up 10%

Net Income: $25.8M up 34%

EPS: $.86 up 37%

• Driven by
  • Increased pawn loans
  • Increased cash advance fees, primarily through their online platform
  • Improvement in the credit quality of the cash advance loan portfolio, which is demonstrated in a decrease in the expense for loan losses

Highlights

• Pawn loan balances outstanding finished Q1 up 11% well ahead of the pace at fiscal year end
• An increase in the sale of merchandise generated an 18% increase in gross profit

Pawn Lending	Q1 2008	Q1 2007
Cash advances written at pawn locations
Funded by CSH	$13,947	$15,486
Funded by 3rd party lenders	$37,996	$44,985
Total	$51,943	$60,471
Avg. pawn loan balance outstanding	$129,349	$118,242
Cash Advance Operations	Q1 2008	Q1 2007
Storefront - cash advances written
Funded by CSH	$153,062	$157,756
Funded by 3rd party lenders	$25,564	$27,079
Total	$178,626	$184,835
Cash advance customer balances due	$43,295	$44,506
Internet Lending - cash advances written
Funded by CSH	$159,921	$128,494
Funded by 3rd party lenders	$98,543	$70,024
Total	$258,464	$198,518
Cash advance customer balances due	$67,528	$56,802

Disclosure: Author owns CSH stock

Comments

[AlanBrochstein]

Brian, have you looked at EZPW? Their payday lending is more traditional, as they have eschewed the online model. Their pawn business, though, is similar to CSH. They also have an understated asset on their balance sheet - an investment in a UK pawn shop chain. I opted for EZPW due to the better balance sheet and less reliance on acquisitions, though the latter isn't significantly different enough to really matter.

[fatcat]

Right now,the income will be strong from purchases of scrap gold..I don't see that mentioned..

[alkaline]

Seems like a great business for an economy filled with debt-strapped consumers facing recession. Regarding the prominent third parties you mentioned, I'm sure they would be in favor of any business that legitimately generates cash into consumers' pockets. CSH management will need to guard against the temptation of gradually easing lending standards over time in their online cash advance business. We have seen where the lure of that easy money leads! Nice well-written article.

[Brian Bober]

Alan,

Thanks for the comment; I have looked at EZPW. I like CSH's online platform because it has higher margins than the storefront operations and the margins should only increase due to low incremental cost.

While it could be argued that the online cash advance product has low switching costs I think the CashNet brand has increasing value and margins should improve as CSH continues to develop its proprietary models for the online platform through experience and incorporating user reputation. Brand and proprietary data are two great ways to build a competitive moat. While CSH competes on price (e.g. interest rates) knowing who to charge how much is the differentiator. Also, I would imagine that the higher quality customers would migrate to the higher quality brand.

I read your article in February and agreed with the premise. Unfortunately, I forgot about EZCorp yesterday when I wrote this article as the stock would have returned me about 15% today (including after hours) due to a nearly equivalent guidance raise; congrats. As you stated succinctly, these companies can adapt quickly to a changing environment because of the high turnover in their loan portfolio. Although, I think CSH is a better long and mid-term option because of its management and online strategy.

[Brian Bober]

The pawn lenders definitely do favor jewelry as collateral. While Cash America hedges, rising gold prices definitely help margins.

Management has stressed focusing on increasing cash flow over revenue growth. Hopefully, this conservative approach and rapid loan portfolio turnover can help keep management focused on earnings not market share. Not having pressure from traders seeking rich annual bonuses should also help.

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