As long-term performers go, I hope to have many more stocks like First Cash Financial (FCFS) before I'm retired as an investor, but I don't expect that I will. Operational excellence and prudent aggressiveness has built this company into a very strong company, and there are still substantial opportunities to grow in the U.S., Mexico, and elsewhere in Latin America. That said, the stock's valuation and slightly lower 2013 expectations may encourage investors to wait before piling into this name.
Another Strong Quarter In Hand
First Cash did pretty much what any reasonable investor could ask of the company, and FCFS certainly closed the year on a strong note.
Revenue rose 21% in constant currency terms, with pawn fees up 37%, merchandise revenue up 31%, and scrap revenue down 12%. Same-store growth in pawn fees was 14% overall, with 19% growth in Mexico and 8% in the U.S. - all of which represented an acceleration from the third quarter. Overall same store revenue was likewise strong - up 8% overall (against 6% in the third quarter), with Mexico up 13% (against 9% in Q3) and the U.S. up 3% (flat w/ Q3).
First Cash not only continues to grow the business, but its profitability as well. Gross margin (which the company reports as net revenue and includes bad debt expense) rose better than three and a half points, while operating income jumped 31% for the quarter.
Strong Growth, And Plenty More Could Be On The Way
Pawn receivables are in some respects another metric of a pawn lender's inventory - historically, more than 70% of First Cash's pawns are ultimately redeemed, and outstanding pawns can rack up additional service fees as customers basically pay to extend the loan. With that in mind, the 36% constant currency growth in pawn receivables was encouraging, with 34% growth in the U.S. and 50% growth in Mexico (20% on a same-store basis).
First Cash also continues to open stores at a rapid rate. The company has 538 stores in Mexico, and 276 in the U.S. after recent acquisitions. That makes First Cash the leading large-format operator in Mexico, and there's still more room for store expansion. Likewise, there's still the opportunity to expand into the larger Latin American market, but investors shouldn't expect rapid developments here.
I'm also impressed by First Cash's relative performance. Cash America (CSH) hasn't reported yet (it's due to do so on Thursday the 24th), but EZCORP (EZPW) has, and First Cash compares quite well. EZCORP saw 11% overall growth and just over 3% organic growth. US/Canada pawn loans were up 5% overall and down 1% on a same-store basis, while Mexican pawn loans were up 55% (and up 28% on a same store basis). EZCORP also saw a greater negative impact from scrapping, and operating income dropped 15%, though the company met analyst expectations on a per-share basis.
Expectations And Improving Credit Could Be Threats
While it's not entirely true that First Cash is a play on a weaker economy, that doesn't mean that the improving economy doesn't present some challenges. Major banks like U.S. Bancorp (USB) and Wells Fargo (WFC) have consistently been reporting better credit card charge-off data and lower delinquency rates on consumer lending. That leads me to wonder if banks aren't willing/able to start expanding credit availability again - perhaps giving more options to potential U.S. customers of First Cash. Likewise, the expansion of payroll lending at banks like Wells Fargo has been an under-reported source of fee income growth.
I'm a little less troubled about the prospects in Mexico. Banks like Banco Santander Mexico (BSMX) and Citigroup (C) love to talk about expanding access to banking services in Mexico, but the real-world experience has been a lot less impressive, and this is at best a multi-year opportunity.
The Bottom Line
All of that said, First Cash is not exactly cheap. The company trades at more than 12 times trailing EBTIDA, and management guidance for 2013 was about 3% lower than the prior average estimate. Now this is definitely a company with a history of under-promising, but I consider myself a bull on these shares and even I think the stock is due for a breather. I see long-term revenue growth potential of 9-10% and a fair value of $50 to $55 on these shares. I'm still happy to hold these shares, but I would suggest investors wait in the hope of a pullback before establishing a significant new position in FCFS shares.