Advance America Cash Advance Centers (AEA) is a Pay Day loan provider with over 2300 centers in the United States with more in Canada and the UK. This company when screened looks like an ideal value buy at $5.89, from a numbers perspective, but looks can be deceiving.
AEA is earning $9.73 revenue per share, and a cash flow of $00.84 per share supporting the fact that is can indeed pay its annual dividend of $00.25 per share. This again points to a value play, but as the numbers unfold it quickly begins to turn south.
AEA is trading at 3 times its book value, which compared with the Financial industry average [companies such as Bank of America (BAC) to Metlife Inc. (MET)] it is trading at a slight discount of 0.5. Now value investors tend to gravitate toward stocks that have a lower book value, typically only 1-2 times the book value.
Price to Sales
With a Price to Sales of only 0.6046 investors should be jumping at this stock. Then we look at the industry average, which is at 10.4, this stock is now buzzing "gold mine." The metrics however are wrong this time. A closer look reveals that AEA's Consumer Financial peers - companies such as Dollar Financial Corp (DLLR), EZCorp Inc (EZPW) and World Acceptance Corp (WRLD) - have an average Price to Sales of 0.9513.
AEA is still impressive with a smaller Price to Sales, but at this point red flags should be going off. This is one of the first signs of a value trap. It does not indicate that it is indeed a value trap, but it is a warning.
Now the company isn't looking so hot. It underperformed the industry average and its peers earning only $00.1222 per share compared with $00.25, and $00.1262 per share.
So, while AEA is falling short when compared with its peers - the payday loan business appears to be drying up. An assumption is that investors just aren't willing to pay a premium for this type of business.
Return on Assets
Not all is bleak for AEA as it has a 10.5% RoA and is actually earning 3.81% more than its peers. Then comparing it to the industry averages of -6.18% tips the judgment for value back into AEAs favor.
Return on Equity
With a return of 17.07% it trounces its peers average of 14.57%, but falls short of the industry average's 23.84%. This shows that AEA makes good use of shareholders dollars in terms of generating revenue.
It also shows that while the company is good, it is not the best. Value investors don't necessarily need the best so long as the company has room to grow, which could be an intellectual property, patent, something that it has that others don't that could push it into being at the top of the numbers.
AEA is lacking this, and that should make value investors a bit gun shy before investing.
Return on Investment
AEA wins big here at 12.03% compared with its peers' 7.74% and the industry's -19.99%.
AEA is what I feel to be a value trap. It looks great, but with a bit of digging through the books and some research on the industry it appears as though the Pay Day Loans are coming to an end. AEA has a -8% dividend growth rate. This is never a good sign for any company. To be fair the growth rate was calculated on a 5 year scale so it does include 2006-07 into the mix.
With AEA you stand to lose $3.96 if the company liquidates, but it is doubtful that will happen. AEA has already responded to the legislation looking to modify or completely eliminate the business model and is priced with that in mind. Looking at a six month chart in March and April when the legislation regarding Texas, and the Pay Day lenders hit the news AEA dipped, but recovered slightly in May when the news faded.
Something to remember about the valuation is that a lot of the legislation is already priced into the stock, which could be why the stock is where it is in terms of value. This again leads me to believe it is a value trap with little potential despite the fundamentals.