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If one peels the results of Cash America International (CSH) and looks at the trends under a flattish revenue and stock performance story, there is a strong franchise that has passed through the transition phase and is ready to move up.

The company's e-commerce business is expanding nicely, both revenue and margins, globally on the back of strong non-payday loans. The success of online is hindered by the weak retail business. The retail services business that suffered due to weak gold prices, weak loan demand and poor availability of scrap gold is close to the bottom, while being reorganized.

Like my earlier report on EZCORP Inc. (EZPW), the stock deserves a second look from investors that haven't looked at the business in a while as the drivers of the business and margins have changed.

Business undercurrents

Cash America International provides pawn shop loans and supporting services including selling of collateral from un-redeemed pawn loans and merchandise purchased directly from the customers. Besides the pawn shop operations, the company originates and guarantees consumer loans for a fee and interest rates.

Growth

As % of Total Revenue

Total Revenue

0%

100%

Pawn Loan fees and service charges

1%

18%

Close to bottom

Proceeds from disposition of merchandise

-16%

32%

Retail shift to help

Consumer loan fees

12%

49%

Strong & growing

Other

46%

1%

Data source: Sec filings

Along with the rest of the industry, the company also suffered for last few years. From last year, the company has reduced its retail store locations by 12% but its online business - Enova - grew nicely. Enova, the company's e-commerce segment, is leading the online lending trend in the industry. It operates in 32 states in the United States and in three foreign countries, which is the largest footprint among competitors; 86% of consumer loans is given to existing customers.

In the most recent quarter, net revenue increased 5% with consumer loan net revenue increasing by 15.6%. Net revenue from pawn-related activities decreased by 5.8%. Consumer loan net revenue accounted for 51.2% mainly due to an increase in consumer loan fees that resulted from an increase in consumer loans written and renewed in the e-commerce segment and a decrease in the loss provision as a percentage of consumer loan fees.

Fast growing Enova to lead the online lending movement

Growing online revenue is overtaking the declining retail services and now contributes almost half of the total revenues, which makes one confident of the growth going forward.

Data source: Cash America press releases

Growth

As % of Total Revenue

Total Revenue

0%

E-Commerce

16%

43%

Retail Services

-10%

57%

This shift towards online is more pronounced in the fastest growing part of the company - consumer loan fee business. Consumer loan fees, after its recent growth, now contribute 49% of the revenues. Online consumer loans at 87% of the total will help drive the growth and improve the margins with lower loan loss provisions.

Growth

As % of Total Revenue

Consumer loan fees

12%

49%

As % of Total Consumer Loans

Loan loss provision Y/Y

E-Commerce

16%

87%

-3%

Retail Services

-7%

13%

4%

Data source: Cash America results

Mexico "full format" stores roll out offer an opportunity

As part of reorganization, the company is planning to expand into Mexico with "full format" stores, those offering both jewelry and general merchandise backed pawn loans after selling off 151 retail stores, which were offering only jewelry loans, in Mexico last year.

Currently, compared to other major competitors, the company has the smallest footprint in this fast growing market for retail pawn stores.

Retail Stores Mexico

CSH

47

EZPW

235

FCFS

516

Data source: First Cash Financial (NASDAQ:FCFS) presentation [pdf]

The draw of Mexico market is due to its fast growth and better yields, which are 152% annualized versus 133% for the domestic retail services. The company's pawn operations in the country saw loan balances growth of 44% and same-store net revenue growth of 66% in the most recent quarter. The remaining stores in Mexico are profitable at store level.

Credit and installment loans businesses in the driver seat

The market is moving away from a single payment loan towards installment loans and credit services. Installment loans grew from 16% of the consumer loan mix 2 years ago to 36% currently, while growing from $38 million in Q2, 2011, to $151 million in the last quarter.

Growth

As % of Total Revenue

Consumer loan fees

12%

49%

As % of Total Consumer Loans

Interest & Fee on short term loan

-8%

63%

Interest & Fee on line of credit

98%

14%

Interest & Fee on installment loans

67%

24%

Data source: Cash America SEC filings

As the worksheet suggests, the short-term loan market is arresting an otherwise impressive growth in the consumer loans business. Short-term loans, which are weak due to low employment and customer de-leveraging, seem to be bottoming out.

As the market moves away from the single payment loans market, the company can leverage a network of existing customers and successfully participate in the growth with fees from installment loans and lines of credit, both of which make up 38% of the consumer loans business.

Retail disposition of merchandise to help margins

The weakest part of the business was the "disposition of merchandise" business, which suffered due to the commercial disposition of merchandise. Due to lower gold prices, the company would shift towards the retail disposition of merchandise.

Growth

As % of Total Revenue

Disposition of merchandise

-16%

32%

As % of merchandise sale

Gross margins

Retail Disposition

7%

68%

37%

Commercial Disposition

-42%

32%

22%

Data source: CSH SEC Filings

This shift should result in improved profitability and a moderation in inventory turnover ratios, as more goods are available in retail locations to increase customer choices of merchandise.

Disposition of merchandise

Gross Margins

Domestic

33%

Foreign

16%

Data source: Cash America

New full format stores in Mexico should also help the company improve its margins from merchant disposition in foreign retail stores.

Acquisitions - another brick in the retail reorganization wall

Making good of the weakness in the pawn business industry, the company has been acquiring a small chain of stores to strengthen its retail presence on a geographical basis. Some of the more recent acquisitions are

  1. 34 stores of PawnMart Inc. for $62 million, which were mainly concentrated in Georgia. Acquisition is earnings accretive immediately after the closing.
  2. 41 stores of Top Dollar Pawn in Texas, for $103 million. Acquisition is earnings accretive.

Valuation

On a relative basis, both EZCORP and Cash America have some catching up to do compared to the fast growing, decent performing but expensive First Cash Financial.

Stock

P/E 2013

P/E 2014

EV/ EBITDA

P/Book

EZPW

$17

8

7

5

1.0

CSH

$46

11

9

5

1.3

FCFS

$57

20

17

13

4.6

On an absolute basis, the valuation is reflective of the weakness associated with the gold business and then some more. Seasonally the fourth quarter is strong for retail merchandise, which has been a drag for a while.

Stock

$46.0

Market Cap ($M)

$1,300.0

P/ Book

1.3

P/ Expected 2013 Earnings

10.9

P/ Sales

0.7

P/ Expected 2014 Earnings

9.4

Rev growth FY 13

2%

EV/ EBITDA TTM.

5

Rev growth FY 14

7%

EBITDA Margins

18%

Operating Margins

12%

Conclusion

It's a strong franchise, which offers an opportunity if valued as a good financial business with a weak but profitable retailer attached to it rather than just a gold play. Target is $60

Source: An Evaluation Beyond The Pawn Operations Of Cash America Is Promising