Community Choice Financial (CCFI) is pricing 10.7 million shares at a price range midpoint of $14.00 per share. The financial services company is hoping to raise $149 million in a public offering set to debut on May 8th, 2012. The small but profitable lender will have a market cap of $261.1 million after the deal. The underwriters and co-managers are Credit Suisse, Jefferies, Stephens, JMP Securities and William Blair.
Community Choice Financial's Business
In summaries of its S1 filing, Community Choice calls its business "financial services for the unbanked and under-banked consumer". In the banking world, these terms describe services like payday loans, short term loans and check cashing. The company has nine brands which provide those services along with pre-paid credit cards and discount auto insurance. These services are primarily for customers who need money right away and are willing to pay exorbitantly high interest rates. Some of the rates Community Choice customers pay are upwards of 180%, meaning a customer financing $2,500 dollars will end up paying back $10,000 dollars after fees, interest and expenses.
The financial sector as a whole has been flat over the past year, while the short term loan business has been gaining strength. This has also led to increasing competition in the sector. There are more than 22,000 short term loan locations in the United States. Last year the industry extended more that $40 billion in these high interest, short term loans.
Community Choice Financial's Public Competition
Community Choice's industry is very competitive and highly fragmented. It competes with retailers which are now offering check cashing services such as Wal-Mart. Many retailers, grocery stores and convenience stores are also now offering money orders, pre-paid Visa Cards, and money transfer services like KMart (SHLD), Kroger Foods (KR) and 7-eleven. Those are all in addition to competition it faces from pawn shops, banks and credit unions.
Community Choice Financial's peers have slightly outperformed the financial sector over the past year. QC Holdings (QCCO), which provides short term loans at over 500 locations, has risen 1.54% over the past year. Cash America International (CSH) has increased its share price by 10.08% over the same time period, while the Nasdaq 100-Financial Index was down 1.06% during the last 12 months.
QC Holdings is trading at a P/E ratio of 6.49 and Cash America has a P/E of 10.62. The average P/E ratio in the Nasdaq 100 Financial Index is only slightly higher than that. If Community Choice Financial prices its IPO at the midpoint of the range, it will be trading at a 15.5 P/E ratio. This makes the IPO price a little high in comparison to other companies in this sector.
Community Choice Financial's Balance Sheet
For 2011 the company generated revenue of $306.9 million with about $16.9 million in net income. The net income number was about half of what Community Choice did in 2010. The lower net income was due to transaction costs and acquisition expenses related to the purchase of 11 locations in Illinois and 141 locations in California and Oregon. Community Choice Financial now operates 435 retail locations in 14 states.
According to the company, the store locations are the primary component for the company's revenue growth because of the nature of its business. For this reason, investors should look at comparable store sales growth as an indication of the success or failure of the company's business operations. Last year the 280 stores it operated prior to the acquisitions in 2011 had achieved 7.3% comparable store sales growth year over year.
How To Trade Community Choice Financial
There are several aspects of Community Choice Financial's business to pay special attention to when evaluating a stock offering -
- The financial sector seems to have bottomed and is on its way to recovery.
- Community Choice Financial has been profitable for the past 3 years.
- Customers need for money at any interest rate may lessen if job growth increases and the economy improves.
- The P/E ratio if CCFI goes public at $14 will be at least 30% higher than many of its peers.
- The companies that offer short term and payday loans are typically considered predatory lenders and may be subject to more government regulations in the future.
With all that in mind, I would recommend that investors give this IPO a serious look. However, it would certainly be more attractive at the $9 to $10 level.