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QC Holdings Inc. (QCCO) is a diversified financial services company that provides payday loans and automotive financing. With a price-earnings multiple of 6.62x and a 4.94% dividend yield, the stock has appeared on the radar of many small cap value investors. In this article, we'll take a look at why the stock represents a great value and some possible reasons for the discount.

Undervalued on the Surface

QC Holdings trades with a price-earnings multiple of 7.35x, which is below the S&P 500's 15.57x earnings multiple, making it a relative bargain for value investors. Meanwhile, its 0.84 price-book ratio means that investors can purchase the company for significantly less than it's worth on paper, while the firm has nearly $20 million in cash on its books.1

Meanwhile, the company offers an attractive 4.94%, or $0.05 per share, dividend yield that rivals many large cap stocks, making it attractive for income investors looking for quarterly payments. The firm has consistently paid this dividend since the beginning of 2007, although the amount has dropped from $0.10 per share to $0.05 per share.1

Finally, the company's board of directors has authorized it to repurchase up to $60 million of their common stock in open market and private purchases in the past. As of March 2012, $55.8 million was purchased; leaving $4.2 million that may still be purchased. Such insider trading has generated some positive sentiments among investors.2

Several Key Risks Could by Why

Despite its attractive valuation, QC Holdings may be undervalued for a good reason. The payday loan industry, which accounts for most of its revenues, has proven to be a hot-button topic for regulators. In particular, there are concerns about a new measure in Missouri, where approximately 29% of its total revenues originate, that could cause problems.2

Missouri has more than twice as many payday loan stores as it has McDonald's and Starbucks combined, which has led to strong public scrutiny. With an interest rate cap as high as 1,980%, the state's grassroots opposition is proposing a new cap at just 36%. The proposal remains mired in legal battles for now, but inclusion on November's ballot could spell disaster.3

According to the company's 10-Q filing:

"A 36% per annum interest rate translates to approximately $1.38 per $100 loaned, which effectively precludes us from offering payday loans in those states unless other transaction fees may be charged to the customer."2

Finally, this wouldn't be the first time adverse regulations have affected the company. In 2009, laws passed in South Carolina, Washington, Virginia and Kentucky resulted in a significant decline in revenues. In Arizona, the existing payday lending law expired in June 2010, creating some problems, while Illinois imposed new restrictions in March of 2011.2

Possible Solutions to Enhance Value

QC Holdings has been trying to diversify its revenues away from payday lending for many of the aforementioned reasons with moderate success. For instance, last quarter's revenues were helped by a new Canadian online lending subsidiary (Direct Credit) that the company acquired last September - helping to offset losses in the automotive division.2

In addition to this purchase, the company has announced plans to diversify by increasing product offerings and distribution, as well as expanding their presence into international markets. If successful, the company could offset many of the aforementioned risks and make the stock truly an undervalued play for investors.2

Finally, the case could be made that many of these drawbacks are already priced into the stock, particularly given the fact that it trades at a discount to its book value.

Sources

  1. Yahoo! Finance
  2. 10-Q SEC Filing
  3. STLToday Article
Source: QC Holdings: A Cheap Play Despite The Risks?