World Acceptance Corporation (WRLD) is a small cap company that Mr. Market forgot to take along during the rally, leaving an opportunity for investors searching to buy a high quality company at a bargain price.
According to the company's profile on Reuters, World Acceptance Corporation "… is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services [...] through 1,137 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico. The Company serves individuals with limited access to consumer credit from banks, credit unions, other consumer finance businesses and credit card lenders."
WRLD competes in the small-loan consumer finance sector which includes pawn shop companies like Fast Cash (FCFS), Cash America (CSH), EZcorp (EZPW) and payday lenders like Advance America (AEA). The average loan of WRLD is $1,180 and has 12 months duration. The company offers installment loans from $300 to $4,000 with maximum duration up to 4 years.
Due to high delinquency rates of 10% to 11% in the small loan market WRLD charges usually the maximum interest rates possible (including fees and other charges) which start from 24% and climb up to 204% annualized. Bellow you can see how the company's loans are distributed along various interest rates.
Interest Rate Range
Percentage of total gross loans receivable
24% to 36%
37% to 50%
51% to 80%
81% to 99%
100% to 149%
150% to 204%
The company's greatest strength comes from its high customer retention rate. Almost 85% of new loans are generated either through existing loan refinancing either through providing new loans to previous customers. Due to this fact the company has a somewhat loyal customer base.
The key for this "loyalty" are the high switching costs customers are facing when they consider changing their loan provider. Customers find it difficult to change their loan provider for a variety of reasons. One reason is the belief that everyone offers pretty much the same product and another is the fact that those who consistently pay their bill on time enjoy better creditworthiness (as the company classifies them as less risky) and better service.
Below is a table with the company's financial ratios which reveal a well managed and high profitable business.
Price at close 16-Oct-2012
No. Shares 30-Jun-2012
Operating Prof. Margin
Net Profit Margin
EPS (after taxes) TTM
P/E - TTM
Operating Cash Flow TTM
Oper. Cash Flow / Share
NAV / Share
Operating Leverage (Assets / Equity)
Additionally the company has a very good growth record with revenue growing at 14.91% on average for the last decade and net income (not EPS) at 18.20% on average for the same period. The reason I don't use EPS to measure growth is that WRLD through extensive stock buybacks has reduced (and continues to do so) the shares outstanding by 28% the last decade from 18 million shares at 2003 to just 13 million as of June 30 2012, increasing substantially shareholder value.
However World Acceptance faces some significant risks. The greatest one is the possibility of the U.S. slipping back into recession. This could result in higher unemployment and subsequently to higher delinquency and bankruptcy rates for WRLD's customers.
The second risk is the possibility of the Customer Financial Protection Bureau (CFPB) getting involved in the installment loans area and putting caps for the maximum rates charged. This could make WRLD's business model unprofitable since profits wouldn't be sufficient to cover loan write-offs and it would be possible that WRLD suspended operations. However this risk is extremely limited in my view and the most likely scenario is for regulation to stay at the discretion of states and the CFPB will only impose better disclosure towards customers.
The overpricing of those risks, I believe, is the main reason for WRLD underperforming the RUSSELL 2000 (IWM) year to date, as shown below (the chart is from Yahoo Finance). This will likely change though, given that the US economy continues to recover and as time passes by the purpose and character of the CFPB becomes more transparent and predictable.
I believe that WRLD's fair value is between $70 and $110 (potential earnings growth excluded) and with 50%+ potential if you buy below $70 WRLD is one good investment opportunity.