Yesterday, Cash America (CSH), the leading pawn retailer and one of the leading cash advance merchants, dramatically raised its Q2 2008 guidance sending the stock up 16%.
[Cash America] expects second quarter 2008 earnings per share to be between 51 cents and 54 cents. The Company’s updated expectation for the second quarter of 2008 is now between 62 cents and 64 cents per share, up over 44% from 43 cents per share earned in the second quarter of 2007. Cash America will release complete second quarter results on July 24, 2008 before the market opens.
This is the second quarter in a row that during the quarter CSH has increased its guidance. On March 24, 2008 CSH raised its EPS guidance to $.80 - 82 from $.70 – 75 then exceeded that updated guidance on April 24 with actual EPS of $.86. Cash America’s business is really running on almost all cylinders.
Revenue from pawn loans and increased gross profit dollars on the sale of merchandise exceeded expectations… [while the] online cash advance product offering experienced strong revenue growth and lower than expected loan losses.
Regulatory Risk
The only cylinder potentially misfiring is due to regulation risks of its cash advance business. This caused the company to reduce full year 2008 EPS guidance by 15 cents and consider closing 139 stores. The regulatory risks warrant caution however several prominent 3rd parties, including the New York Fed and Yale, have released major studies demonstrating the positive effects of CSH’s type of short term lending.
Online Short-Term Financing Platform
Cash America has a strong, growing online cash advance platform. This platform offers short-term cash advances over the Internet to customers in 32 states and in the UK. The online platform, which was acquired in September 2006, has spent years getting various regulatory approvals and tweaking its proprietary lending models. Recently the president of the Internet Services division purchased 57,400 shares of CSH.
Crossover of Retail Customers
The current consumer lead recession has driven many sub-prime lenders from the market. This has caused many new marginal borrowers to seek financing from Cash America. In addition, many traditional retail customers are crossing over from traditional retail to pre-owned merchandise. Cash America offers a smooth transition for many customers with its strongly branded safe, clean stores easing the migration of new customers. The pre-owned merchandise offered by CSH allows consumers to stretch their limited dollars. For example, it is common for jewelry to be priced 35-40% below traditional retail outlets.
Solid Management & Growth
CSH’s seasoned management has a history of being conservative and open with shareholders. The company’s growth is high quality coming from its brick and mortar stores’ organic growth (not by opening new stores) and through the company’s online platform. Even after yesterday’s run-up Cash America has a P/E around 12 based on its current 2008 full year guidance which now appears extremely conservative. Below I’ve included a summary of Cash America’s Q1 2008 results to provide a better understanding of Cash America’s business and results.
Q1 2008 Results (April 24, 2008)
Revenue: $250.9M up 13%
- Pawn segment: $170.3M up 14%
- Includes finance and service charges on pawn loans and proceeds from sale of merchandise
- Cash Advance segment: $79.6M up 10%
Net Income: $25.8M up 34%
EPS: $.86 up 37%
- Driven by
- Increased pawn loans
- Increased cash advance fees, primarily through their online platform
- Improvement in the credit quality of the cash advance loan portfolio, which is demonstrated in a decrease in the expense for loan losses
Highlights
- Pawn loan balances outstanding finished Q1 up 11% well ahead of the pace at fiscal year end
- An increase in the sale of merchandise generated an 18% increase in gross profit
| Pawn Lending | Q1 2008 | Q1 2007 |
| Cash advances written at pawn locations | ||
| Funded by CSH | $13,947 | $15,486 |
| Funded by 3rd party lenders | $37,996 | $44,985 |
| Total | $51,943 | $60,471 |
| Avg. pawn loan balance outstanding | $129,349 | $118,242 |
| Cash Advance Operations | Q1 2008 | Q1 2007 |
| Storefront - cash advances written | ||
| Funded by CSH | $153,062 | $157,756 |
| Funded by 3rd party lenders | $25,564 | $27,079 |
| Total | $178,626 | $184,835 |
| Cash advance customer balances due | $43,295 | $44,506 |
| Internet Lending - cash advances written | ||
| Funded by CSH | $159,921 | $128,494 |
| Funded by 3rd party lenders | $98,543 | $70,024 |
| Total | $258,464 | $198,518 |
| Cash advance customer balances due | $67,528 | $56,802 |
Disclosure: Author owns CSH stock
