Picking up from my previous article, Citron continues their short-selling campaign against World Acceptance Corp (NASDAQ:WRLD) by lobbing grenades at their perfectly legal business and accounting models. Let's take apart Citron's latest pile of rubbish and demonstrate that, again, Citron's Emperor has no clothes.
Citron's tactic is to make moral judgments about World to soften readers up and make them more likely to accept bogus claims about the state of World's financials and its business model. Citron's National Enquirer headline, screaming at readers in bold, claims that "Financials at World are worse than they appear".
This is an outright lie.
It’s a lie because Citron is 100% wrong about how World does business and accounts for it.
Yes, World collects its revenue based on the "Rule of 78's", or using "pre-computed" interest. This means that World's loan repayment schedule is amortized, just like a mortgage. So monthly payments earlier in the cycle are devoted more to interest than to principal. If World operates in a state that permits this methodology, they use it. Therefore, it is legal. It is also disclosed to the customer, per TILA.
A customer comes in, and wants a $1000 loan with 9 month maturity. He gets the loan at, say, 30% APR. Under an amortized schedule, after four months, he will have paid $408.28 in principal and $113.48 in interest.
Then he refinances. That means he is given a new $1000 loan, uses $591.72 to pay off the remaining principal of his first loan, and walks out the door with $408.28. He owes $1000, again due in 9 months. So just like a mortgage, customers develop equity in their loans. There is no “flipping”.
Citron claims, “When a borrower fails to make scheduled loan payments to a normal bank, the bank is required by regulations to categorize the loan as impaired. With World, it just gets flipped to a new loan with a higher principal.” False.
What Citron implies is that World engages in “loan pyramiding”, in which another $1000 is added to the principal already due. Only an ignorant businessman would operate that way. What idiot would add principal to a loan that the borrower is telling you he already will be unable to pay off?
For Citron to claim that “much of this revenue is not real” is also false. The revenue is real. It’s cold hard cash that goes into World’s bank. What Citron does understand is that the Rule of 78’s is not a Generally Accepted Accounting Principal. So World uses the effective interest method – where the interest is spread out equally over every month -- but the differences between the two are negligible. Ask your accountant. He’ll agree.
It's all right there in World's filings. "Gross loans" is defined as full anticipated payoffs.
"Unearned charges" are defined as income earned over time as payments are made.
"Net loans" is defined as the true principal balance. Very simple – if you want to take the time to learn the truth.
It'd be one thing if this were Enron and it were a complicated business to understand. But World's business is about as simple as they come, and if its auditing firm were deliberately misleading investors, everyone involved risks some pretty severe consequences.
Therefore, Citron’s statement that “the income statement is a lesson in subterfuge… it just accumulates as a near half-billion receivable of dubious collectibility on its books” is also false.
As for that half-billion in receivables, they are most certainly collectible. With the exception of charge-offs, which historically average 14 – 16%, these are all loans just like I mentioned. People pay on them, they refinance, and they continue to pay on them. And even if by some bizarre twist of fate, legislation were to put World out of business (it won’t happen - I'll tell you why in the next article), then World would just wind down their portfolio of loans. People would pay off, but they couldn’t refinance. Arguably, charge-offs might be higher, but World would obviously make whatever accommodations were necessary so they are paid off as much as possible, Again, this is an extremely unlikely apocalyptic scenario –which I’m sure Citron will raise as being right around the corner in part 3 of their smear job.
Citron claims that, “loans rarely go to maturity”. False.
In fact, it’s hard to say just how many do go to maturity from reading the financials. Let’s say the company starts with $500 million in receivables at the beginning of the year, and ends the year with the same amount. The actual principal advanced would be 3 – 3.25 times that. Why? Because you must subtract the 16.5% in charge-offs that occur. Then you add back the 12% growth that it had. Then you account for the 73% of customers that refinance, and 7% of former borrowers who return for new loans (which begs Citron’s assertion, if they were being “ripped off”, why did they come back?).
The result of all this is that you have a relatively high number of customers who owe nothing. Their loans are paid off. Want to know how many? Call World’s CFO. I’m sure he’ll tell you. (Why didn’t Citron bother to do this?)
We won’t even bother with Citron hauling out a few meaningless lawsuits. I’ve already debunked why the New Mexico case will have no material adverse effect on World (the entire agreement isn’t void, only the arbitration clause is). The other suits fall in the same category. The company does not disclose immaterial litigation, so why would it disclose immaterial litigation that has been settled? But notice how Citron scares readers by saying how “doors will be opened… collections will be impaired… a loss in a class action could impair World’s operations…. lead to a large adverse judgment… there is greatly increased risk that this suit will be litigated as a federal class action…”
The number of events that would have to occur for all these things to happen is as likely as Citron apologizing for every one of its lies. These are all scare tactics with no substance behind them. For God’s sake, Citron cannot even understand a balance sheet! We’re supposed to listen to its legal opinion?
And it doesn’t stop! Citron claims the payday lenders have a better risk of collection on their portfolios than World does.
Say it with me. “False”.
World’s charge-off rate is 14-16%, which is LOWER than that of most payday lenders, which average in the low twenties!
As if Citron’s duplicity weren’t enough, they actually claim that World hastily convened a board meeting on Monday in response. In fact, the board meeting had been scheduled far in advance, just like they always are, and they authorized a stock buyback because they think the stock is cheap.
And speaking of balance sheet ignorance, Citron asks how World, with only has $6.2 million in the bank, will buy back the $15 million in stock they’ve been authorized to.
Uh, hello? It’s called a bank credit facility, of which World still has some $40 million remaining on it.
World Acceptance is on solid footing. Its business model has supported the company for 45 years. Its business provides people who have little access to credit with a lifeline. All fees and interest rates are disclosed. The revenue realized is real, hard currency. There are no accounting shenanigans, and no lawsuits that will materially affect the company.
Citron would be wise to issue a retraction. My old high school teacher would chastise us whenever we were being stupid. He told us that meant we were being ‘intellectually lazy”.
The question for Citron’s Andrew Left is this: Are you being stupid or are you deliberately making false statements about the company to cause a selling frenzy because you are short.
Perhaps the SEC would like to know, also.