First-Half Earnings From Payday Lenders May Show The Industry Is In Decline

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Includes: CSH, GDOT, WRLD
by: Tedra DeSue

Summary

Investors are waiting to see how publicly-traded payday lenders fared during the first half of 2015. They report earnings over the next two weeks.

Payday lenders that have shifted their services to other offerings like buying and selling goods through their pawn shop businesses are stronger.

Investors, however, have profited as the lucrative fees these companies generate have helped their top and bottom lines.

The payday lending industry is often frowned upon because of the business models that are used by some of the companies operating in the space. Many say these models prey on the poor. On that same note, investors champion these companies that are publicly traded. That can be seen clearly in the rise in their earnings.

Most interesting is that these payday lending companies continue to thrive despite a myriad of state and federal laws and regulations that seem to be structured to run them out of business. Over the past few years, several payday lenders shut out of certain states, like Georgia, because of the laws that were passed to protect people from being ripped off by payday lenders.

Payday lenders make their money by making loans to people, often at very high cost to the consumers. Those consumers are expected to repay the loan at the time of their next payday. Those lenders that stayed in these states still had to shift their business models, like pawning services.

According to Landmark Cash, which provides a lender matching service, having poor credit won't necessarily block loan approvals. Although borrowers must still meet loan requirements; many of its lenders do not check credit reports since the payday loans are made for small amounts and are repaid within a short time - your next payday.

In addition to the loan, the consumers have to pay an exorbitantly high amount of money in interest. For example, a $500 loan can easily be tacked with $100 in interest and other fees. Often, when the loan comes due, consumers who don't have the money to pay back the loan are offered the option to roll the loan over until their next paycheck. With that privilege comes more fees.

Many borrowers end up in what seems to be a never ending cycle of rolling over the loans, and accruing a ton of fees in the process. The payday lender ends up profiting hugely, which is reflected in their earnings.

Take Cash America (NYSE:CSH), for example. Since February, its stock has risen substantially. At that time, it was trading at about $20 a share. Now, it is approaching its 52-week high - $28.68. It closed Friday at $27.79.

Cash America's earnings performance has been strong enough to capture the attention of Keefe, Bruyette & Woods. This month, the firm initiated coverage of the payday lender with a Market Perform rating and a price target of $23.

Cash America's business model includes payday lending and pawning services. With all of the hoopla over the payday lending and the handicaps constraining the lending practice, i.e. laws and regulations, CSH beefed up its pawning services. By shifting its focus to the more profitable pawning business, the company has seen its earnings increase.

According to Benzinga, Cash America spun off 80% of Enova (which handled its payday lending business) during the fourth quarter of 2014. It also sold its operations in Mexico. Being focused on its pawning services and reducing its exposure to payday lending services was seen as a positive by Keefe, Bruyette & Woods.

Also, JMP Securities found favor in Cash America. It upgraded CSH to Market Outperform from Market Perform in May. We should get a better idea of how the company performed during the last quarter when it reports its earnings later this month. It is expected to report second-quarter earnings on July 30.

Another company involved in the payday lending industry is Green Dot Corporation (NYSE:GDOT). It touts itself as providing banking options to consumers who have never had a bank account and those who are considered underbanked because they don't qualify for accounts at traditional banks.

Zacks noted in July that its stock has moved higher by 44.8% in the past month. Furthermore, it is trading above its 20-day SMA.

"This combination of strong price performance and favorable technicals could suggest that the stock may be on the right path," Zacks reported. In saying the company was on the right path, Zacks was referring to a sharp decline in the company's stock. In February of this year, Zacks and much of Wall Street looked unfavorably at Green Dot. GDOT seemed to be in a negative trend in earnings estimate revisions, according to Zacks. It drew that conclusion from three lowered earnings estimates compared with no upward revisions.

Then, in June, Green Dot announced that it had reached a five-year agreement with Wal-Mart (NYSE:WMT) to offer its prepaid debit cards. When the deal was announced, GDOT's stock soared almost 30% in one day.

World Acceptance Corp. (NASDAQ:WRLD) is a peer of Green Dot and Cash America, although it is not enjoying an uptick in its share price. While World Acceptance's and Cash America's stocks are approaching their 52-week highs, WRLD is approaching it 52-week low. It closed Friday, July 16, at $58.31. Its 52-week low is $56.42.

To put that in perspective, its 52-week high is $96.23. The stock has fluctuated greatly over the past 52 weeks. It started its slide in May when it was trading around $95 a share. Then, at the end of June, it tumbled even more, losing almost 30 points. It eventually settled at $56.42 at the beginning of July.

A reason behind its slump relates to claims that the company misrepresented investors. Specifically, according to Goldberg Law, the investigation focuses on whether World Acceptance and its officers violated securities laws by issuing misleading information to investors. World Acceptance is expected to report earnings on July 23.

Payday lending is becoming less profitable due to all of the new laws and regulations. The savvy businesses operating in the space wised up and began concentrating on other ventures, like pawning services. If you have the stomach to tolerate the risks involved and invest for the long term to weather the volatility, this space could make you money. These companies address a need that many Americans face. Emergencies, overdue bills and other situations may be difficult for the underbanked, unbendable, and even traditional bank customers to cover. Payday lenders will always be needed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.