(By Michael Vodicka) Weak economic growth and high levels of unemployment will affect different companies in different ways. For most, those conditions will lead to slower sales growth and weaker demand. But there are other companies that are actually counter cyclical, ones that see an uptick in consumption of their products or services in a weak economy. Those are the kind of stocks that can give your portfolio a very nice defensive cushion should a bear market reach out and growl.
One of those companies is First Cash Financial Services (FCFS), a leading name in the pawn and payday lending space. First Cash operates 632 pawn stores and 106 payday lending stores for a total count of 732 stores in eight U.S. states and 23 Mexican states. With a market cap of just over $1 billion, First Cash is a mid-size small cap, a segment of companies typically known for more growth and volatility.
And that's exactly what we've seen this year. In spite of the company's impressive sales growth, with revenue up 11% in 20009, 17% in 2010 and an even better 23% in 2011, shares have recently taken a bit of a nose dive, pulling back more than 20% in the last month in the weak market. But what's most interesting about that bearish movement is that it comes on the heels of another solid quarter where the company beat expectations and raised its full-year guidance.
Excellent Q1 Results
Revenue for the period was up 16% from last year to $135 million. Earnings also looked good, coming in at 58 cents per share, 5% ahead of expectations, in line with the company's average earnings surprise over the last four quarters. But looking forward, there are still plenty of reasons to be bullish on this highly specialized business in an industry with relatively high barriers to entrance.
Reason to be Bullish
The first is its international growth, where First Financial continues to see stellar results out of Mexico. That has the company adding new stores at a breakneck pace, with 49 of 54 store openings in the first quarter in Mexico. Over the past 12 months, First Financial added a total of 92 large-format stores in Mexico, so this is clearly an area when the company is making big investments in future growth.
But beyond simply increasing sales volumes, First Cash also enjoys tremendous pricing power. Its great results out of Mexico were driven by a 33% increase in pawn fees. It was also able to increase pawn fees by 12% in the U.S., showing strong pricing power in domestic markers as well.
Beyond sales growth and margin strength, First Cash is also fresh off the heels of a massive share buyback program, repurchasing 2.8 million shares over the last year for a total of 9% of the company. That is a sign of confidence that management is confident in its ability to tap into new markets and drive more growth.
Looking forward, if there is one threat to the industry and First Cash, it is regulation. The industry has become a bit of a punching bag for politicians and legislators looking to clamp down on so called "predatory" lending practices. That is your single biggest source of risk in owning a pawn or payday lending stock.
Estimates and Valuation
All those bullish factors are showing up in estimates, with the full-year 2012 estimate of $2.72 calling for 21% growth from last year. The full-year 2013 estimate is pegged at $3.19, a healthy 17% growth projection.
That upward movement in estimates while shares have fallen has pushed the valuation below historical averages, with a PEG ratio of .67C below the 10-yr median of .77X over the last ten years and well below the high print of 1.11X.
On the chart, First Cash has pulled back pretty sharply over the last month in the weak market, falling more than 20% from its recent all-time high above $47. But in the meantime, estimates have held up just fine, providing an opportunity to buy shares at a discount from historical averages. Take a look at the recent pullback below.
First Cash Financial Services, Inc. (FCFS) 2012 Daily Chart
(click to enlarge)