- International pawnshop operator and payday lender, DLLR is suffering from three headwinds impacting the stock simultaneously.
- The weakness in gold has reduced the number of consumers looking to sell their gold for cash to DLLR.
- The weakening of the Canadian dollar against the US dollar is hurting the firm's profits in USD terms.
- New regulatory requirements for payday lenders in the UK are stoking concerns about market share impacts.
- These headwinds will take time to resolve, and so despite the large amount of negative news priced into the stock, I remain on the sidelines.
There have been many victims of the gold bubble bursting over the last year from investors in the gold ETF (NYSEARCA:GLD) to those in junior miners (NYSEARCA:GDXJ), and even bigger gold miners like Newmont (NYSE:NEM) and Barrick (NYSE:ABX). One unnoticed group of firms that has been slammed by gold's decline though, are alternative finance companies like pawnshops and check cashing stores. Many (though not all) pawnshops and check cashing stores capitalized on the enthusiasm for gold over the last few years by paying cash for customers unwanted and scrap gold, mainly in the form of jewelry. For these companies though, the problem with gold is not the low price necessarily, so much as the general change in the national mood on the metal. Up until the end of 2012, and stretching back over at least five years, the widespread perception had been that gold's price was very high and that the metal was quite valuable. Hence people wanted to sell their scrap gold. Since the collapse of gold prices over the last year, it seems to me that the mood on gold has changed. People no longer look at it as being highly priced. Those with gold to sell today, probably look back and wish they could have sold it a year ago, or that prices would rise again. Maybe they will, maybe they won't. I'm not here to opine on that. You see, this isn't really an article about gold.
Instead, I'm more interested in what has happened to an unexpected victim of gold's collapse; DFC Global (NASDAQ:DLLR). DFC Global, once known as Dollar Financial Corp, is one of the biggest check cashing and pawn brokerage companies in the world with ~1,500 locations in not only the US, but also Canada, the UK, Sweden, Finland, Poland, Spain, and Ireland. What many investors may not realize is that DFC Global's services make it an important form of financial company for lower class people in its footprint. The firm's services include short-term consumer loans, secure pawn loans, check cashing, money transfers, money orders, prepaid debit card sales, and gold buying services.
To be honest, DFC Global is not a popular company with many government officials, social activists, or even investors. There are a lot of people out there that view the short-term lending business as usurious or immoral. This view of the company leads it to face significant regulatory scrutiny. For many investors then, the company will never be an appropriate investment given the level of risk at the firm. Those long-term investors who are willing to buck the trend might find DLLR to be a good choice though - particularly now when sentiment on the company cannot get much worse. Before I explain why though, let me talk offer some background on the stock's recent performance.
DFC Global recently reported disappointing earnings that hammered the stock, continuing a long negative streak for the company that has been on-going for months. The company's profits fell nearly 90% versus the year-ago period when it reported earnings in late January, and the company cut guidance for the current year from a range of $0.65-$1.27 down to $0.35-$0.80. Current quarter earnings also missed expectations ($0.06 vs. $0.19), as did revenues ($262M vs. $272M). It is not surprising then that the market was not pleased and responded by cutting the stock price nearly 20%.
With DLLR having come down from $20 a share to around $7, investors have to wonder whether this is a good time to invest in the company. The answer to that is based on what one thinks of the three major headwinds buffeting the company right now. First, as I mentioned at the start, the fall in the price of gold has put a serious dent into the volume of customers bringing gold into DLLR's shops to sell. Second, the turmoil in the currency markets and in particular the weakening of the Canadian dollar are hitting DFC Global's profits in US dollar terms. And third, unfavorable regulatory conditions in the UK are affecting DLLR's operations in that country.
In the UK, the Financial Conduct Authority (or FCA) is set to take over regulation over the consumer finance industry in April. It's powers will be broadly similar to those of the CFPB here in the US. The FCA is proposing rules that will limit the rollovers on payday loans to two extensions, and only two attempts to collect money from customers accounts using CPA. These rules will reduce DFC Global's ability to profit from and collect from certain classes of customers, so I would expect they will reduce the company's revenues somewhat. That said, the company has already been moving in this direction, so the revenue hit should be much less than it would have been even a few years ago. DLLR has already put in place a three rollover cap on loans, and started to transfer its debt collection from a CPA-based system to traditional methods like call centers. These actions were correlated with a troubling rise in the number of defaulted loans at the company. It's my opinion that this rise in defaults was likely a result of DLLR needing to develop a system to effectively collect using the more traditional methods, and thus the increased default rate should moderate over the course of the next couple of quarters. Indeed once the new rules are implemented, it is possible that smaller payday lenders in the UK will have a hard time dealing with them effectively, and that this will lead to them turning away some customers that DLLR can deal with, or even to close up shop altogether. Thus it is possible that DLLR can benefit from this increased regulatory scrutiny. Such a benefit is unlikely to show up until the second half of this year at the earliest though. Overall then, the regulatory changes in the UK are hurting DFC Global for now, but should not be a long-term problem.
An additional quasi one-time issue that hurt the company recently as well was the settlement of a Canadian class action lawsuit with an expense provision of $46 million. In theory this kind of charge should be a one-time event, but in practice, given its industry, DFC could very well face similar suits in other jurisdictions in the future. Thus this kind of charge needs to be considered by investors as a possible cost of doing business for the firm.
So while the lawsuit issue and the regulatory changes are issues which investors can get clarity on, and where DFC Global has at least some self-help actions it can take, the FX and gold market turmoil are less addressable. It stands to reason that eventually the FX market headwinds will subside since Canada is a well-developed economy. This could take a while though. By the same token, the price of gold may or may not go back up, but overtime once the price levels out consumers should get used to it. This will then probably lead to some rebound in the level of cash for gold sales across the industry in general and for DLLR. Again though, this could take easily six months or more. Overall, while DFC Global is probably cheap at these levels, trading at perhaps 10X CY EPS in what is admittedly a depressed earnings year, the negative sentiment on the stock and persistent headwinds are likely to hold the price back for some time to come yet.
Disclosure: I 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.