Signs Of Progress At First Cash Financial, But The Model's Changing

While it's a long-term position for me, my feelings about First Cash Financial (NASDAQ:FCFS) have been relatively tepid of late. The impact of a weaker Mexican peso hasn't concerned me much on a long-term basis, but I've been more troubled by First Cash's struggles to generate meaningful growth in its U.S. business and/or wring noticeable margin leverage out of its recent consolidation efforts.

First Cash is still in a tricky position. Trends in the peso and gasoline prices had been moving in a company-friendlier direction, but that has shifted more recently. On a positive note, consumer trends in Mexico remain strong and there are long-awaited signs of improvement in the U.S. business that give a little hope for the coming quarters.

The merger with Cash America (NYSE:CSH) is a major swing factor, though, and one that I believe does add long-term value. The key there is "long term." Overweighting back to the U.S. market is going to meaningfully slow the internal growth rate for a few years, but the greater cash flow generated by this larger U.S. store footprint can, in turn, self-fund a stronger long-term expansion into higher-growth Latin American markets.

My fair value of $53.50 doesn't offer a lot of near-term upside, but a further strengthening of the U.S. business would represent upside, and I'm pleased with how the Latin American business continues to develop.

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Signs Of Progress At First Cash Financial, But The Model's Changing

Seeking Alpha: First Cash Or 'First Peso' Financial?

The tough times continue for First Cash Financial (NASDAQ:FCFS). While the stock has recovered much of its post-earnings freak-out, the fact remains that estimates are now about 17% lower for 2016 and 12% lower for 2017 and the company continues to struggle with adverse currency movements and weak core demand in its U.S. operations. What's worse, there's not a lot of obvious steps for the company to take to combat these issues.

Given the likelihood of a weaker-for-longer U.S. operation and ongoing currency pressures, I've trimmed back my expectation for the next three years. That has pushed my fair value down to about $42, and that is still predicated on low double-digit long-term annualized free cash flow growth. While the currency situation could reverse and provide a much-needed boost, it's going to take a while for First Cash to regain its footing.

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First Cash Or 'First Peso' Financial?

Seeking Alpha: Persistent Sluggishness In The U.S. A Growing Problem For First Cash Financial

It's getting harder and harder to give First Cash Financial (NASDAQ:FCFS) the benefit of the doubt. While the currency issues that are pressuring the reported revenue from the company's large Mexican operations are arguably forgivable, the persistent sluggishness in the U.S. operations is harder to excuse. What's worse, I don't think investors are, or should be, all that happy that the company has committed sizable amounts of capital towards consolidating the slow-growing U.S. pawn market and held off on expanding into faster-growing regions like Colombia and Peru.

Cutting expectations for a stock you've recommended is never fun, and it's even less so when you own the shares yourself. The reality, though, is that First Cash has been a rotten stock over the last year, with the shares down about 30%. While there is still an opportunity for First Cash to generate high single-digit to low double-digit growth in Mexico for years to come and generate better margins from the U.S. operations, this is very much a "show me" story today.

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Persistent Sluggishness In The U.S. A Growing Problem For First Cash Financial

Seeking Alpha: First Cash Financial - The Battle Between Good Long-Term Potential And Weak Near-Term Momentum

Pawnshop operator First Cash Financial (NASDAQ:FCFS) remains stuck in a relative lull, caught up in foreign currency pressure in Mexico and a challenging operating environment in the U.S. Although margins are holding up better than expected and there are reasons to believe that both the U.S. and Mexican operations can improve as the year goes on, it seems unlikely that this company can generate the sort of headline profit momentum that would get investors interested in the shares.

As a long-term shareholder of First Cash who has seen years of ups and downs, I'm inclined to wait it out. Although I do not expect robust growth in the U.S., I do believe that further regulatory efforts to curb other types of short-term lending will benefit the pawn industry and that First Cash is well placed to benefit from consolidation. I likewise believe that the company still has many years of double-digit growth in Mexico to look forward to, as well as potential expansion into new markets. The long-term potential continues to support a fair value in the high $50s to low $60s, but the company is likely still facing a few trying quarters.

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First Cash Financial - The Battle Between Good Long-Term Potential And Weak Near-Term Momentum

Seeking Alpha: First Cash Continues To Invest For The Long Term

These still aren't the best of times for the pawn/payday lending segment of the specialty lending industry. Gold is setting multiyear lows, limiting jewelry-based pawn lending growth, while Mexico's economic recovery remains slow. First Cash Financial Services (NASDAQ:FCFS) has done alright since my last update, rising more than 2% and beating both the S&P 500 and EZCORP (NASDAQ:EZPW), but lagging Cash America (NYSE:CSH) and not exactly setting the world on fire.

The potential undervaluation here is not necessarily remarkable (in the neighborhood of 10%), but First Cash does appear poised to grow free cash flow at a double-digit rate for many years to come. What's more, management is making use of its cash flow and healthy balance sheet to acquire stores in the U.S. and Mexico at attractive multiples and is likely still considering expansion into additional markets. Weak gold prices and muted retail demand are near-term threats, but I believe First Cash is taking advantage of the present trying times to build its base and position itself for stronger growth down the road.

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First Cash Continues To Invest For The Long Term

Seeking Alpha: EZCORP Has Been Treading Water While Improving

Eight months ago, I wrote that while EZCORP (NASDAQ:EZPW) had some interesting turnaround potential, I really didn't like the company's operating/ownership structure, nor its operating model. Prior to an announcement in May that I believe is transformative for the company, the shares were tracking down around 5% and the quarterly results were still showing some pressure. While the company is likely to see ongoing pressure in scrapping, comps should start getting easier later in calendar 2014 and the company's valuation is undemanding.

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EZCORP Has Been Treading Water While Improving

Seeking Alpha: Under Fire On All Sides, First Cash Financial Slides Back Toward Value

As I warned the last time I wrote on First Cash Financial Services (FCFS), I thought the stock was expensive and the risk/reward balance wasn't so favorable to new investors. Although I didn't expect First Cash to get hit as hard as it did in the fourth quarter, disappointing results (and an even more disappointed market) have taken a sizable chunk of the excess enthusiasm out of these shares. First Cash still isn't what you might call a screaming bargain, but I believe its one of the best-run companies in consumer finance and I believe the company's long runway of growth in Mexico (and other Latin American countries) and consolidation opportunities in the U.S. make it a stock to consider on this pullback.

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Under Fire On All Sides, First Cash Financial Slides Back Toward Value

Seeking Alpha: It's Not Just Gold That's Troubling EZCORP

This hasn't been the easiest year for pawn and payday lenders not named First Cash Financial (FCFS), and EZCORP (EZPW) has certainly found itself caught in that downdraft, with the shares down more than 40% over the past year. While fellow Seeking Alpha writer Igor Novgorodtsev gave a good rundown on EZCORP's gold scrapping issues, I believe there is more at work here than just the price and profitability of gold scrapping. Not only does EZCORP have a shareholder-unfriendly structure, but the company's losses on consumer loans and market positioning both concern me.

Now, the real question is how much a "concern" is worth. I think First Cash is hands down the better company (and I've owned it for quite a while), but it's hard to see EZCORP get hammered to such a level and not wonder if it has gone past the point where enough's enough. I do worry about EZCORP's fundamental market positioning and the risk to the model from both credit losses and regulatory changes, but even conservative assumptions seem to suggest these shares could hold real turnaround potential.

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It's Not Just Gold That's Troubling EZCORP

Seeking Alpha: First Cash Isn't Cheap, But The Growth Story Is Top-Shelf

Right off the bat, I'm not going to go to any great lengths to defend the valuation at First Cash Financial (FCFS). These shares have outpaced the S&P over the past 12 months and trade at nearly 14 times trailing EBITDA. On the other hand, the company believes it can still grow its Mexican store footprint by 50%, while also taking advantage of high-quality consolidation opportunities in the U.S. Add in the potential to expand to markets like Colombia and Peru and I think you can argue that even though these shares aren't cheap, you are at least getting your money's worth and the company still has the potential to outperform.

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First Cash Isn't Cheap, But The Growth Story Is Top-Shelf

Seeking Alpha: Non-Core Ops Nail First Cash In Q2

First Cash Financial Services (FCFS) has been a solid growth stock for quite some time now, delivering better than 17% annual revenue growth over the past three and ten years and delivering market returns of almost 130% and over 900% over those time periods. But it has also always been a volatile stock as well as a quick look at a long-term chart will show. Some of that volatility can be tied to the economy or the evolving regulatory environment for pawn lending (and to a lesser extent payday lending), but some of it is simply the ups and downs of the business.

Those "ups and downs" came back to bite First Cash this quarter, as significantly lower gold scrapping and a lower peso led the company to lower guidance for the year about 10% a month ago and led to a second quarter financial report that was weak on multiple lines. While the stock has already reclaimed some of the lost ground and remains a promising long-term growth story, I wouldn't encourage new investors to rush into this name at this point.

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Non-Core Ops Nail First Cash In Q2

Seeking Alpha: First Cash Financial Delivers The Growth, But Mind The Valuation

As long-term performers go, I hope to have many more stocks like First Cash Financial (FCFS) before I'm retired as an investor, but I don't expect that I will. Operational excellence and prudent aggressiveness has built this company into a very strong company, and there are still substantial opportunities to grow in the U.S., Mexico, and elsewhere in Latin America. That said, the stock's valuation and slightly lower 2013 expectations may encourage investors to wait before piling into this name.

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First Cash Financial Delivers The Growth, But Mind The Valuation

Seeking Alpha: High Expectations And Uncertain Strategy Could Challenge First Cash Financial

While I'm a happy long-term shareholder of First Cash Financial (FCFS), it is well worth asking what the next year may hold for this generally under-followed and under-known financial services company. Same-store growth has stalled a bit, gold prices are uncertain, and investors continue to look for more definitive guidance about the company's future growth plans. Couple that with a relatively fair valuation, and these shares could appear to some to be liable for some sluggish performance.

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High Expectations And Uncertain Strategy Could Challenge First Cash Financial

Seeking Alpha: Slower Growth May Be A Good Thing For First Cash Financial

It was only a few weeks ago when I wrote that investors ought to consider taking advantage of a pullback in pawn store operator First Cash Financial (NASDAQ: FCFS). Since then, the stock has bounced back to the tune of 15%. Now with fourth quarter earnings in hand, it's a good time to review the thesis and what's going on with this Latin American consumer play.

A Fourth Quarter More Or Less As Expected
First Cash Financial gave analysts revised guidance closely before its official earnings release and so the reported earnings weren't too terribly surprising. Revenue was a little disappointing relative to original expectations, though 15% reported growth and 20% constant currency growth doesn't sound so bad. Unusually for FCFS, revenue growth in the U.S. was stronger than in Mexico. More on this in a minute.

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Slower Growth May Be A Good Thing For First Cash Financial

Seeking Alpha: Another Pullback, Another Opportunity in First Cash Financial

The history of pawn shop operator First Cash Financial (FCFS) has always been marked by pullbacks and retracements, and those have often been good times to reload on what has been an excellent decade-long growth story. Although concerns about the health of the Mexican operating environment and the direction of gold have pulled this stock back from its highs, First Cash remains a high-growth/high-return play with a big international kicker.

A Dose Of Reality To End The Year
Although First Cash had enjoyed a pretty good run for much of 2011, the stock has weakened lately on worries about the health of the company's Mexico operations. Supplying over half of the company's revenue and a lot of the growth, conditions in Mexico have weakened in part due to violence in Northern Mexico, some reduction in loan demand as the economy softens, and lower loan-to-value ratios as the company works to maintain margins and pricing discipline. Making matters a little worse, a weakening peso is a threat to earnings as well.

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Another Pullback, Another Opportunity In First Cash Financial

Stocks I'm Looking At - Rent-A-Center

I thought it might be an interesting exercise to write a bit here and there about stocks I'm looking at as possible watchlist or portfolio additions. Maybe the process of writing out a thesis will help clarify my thinking.

Also, I encourage anybody with opinions/comments to please contribute them.

The quick take-away:
Rent-A-Center (RCII) is a leader in its rent-to-own (RTO) space.  RTO is basically like payday lending for merchandise; the company does not bother with normal credit checks, but charges people on the basis of significant mark-ups (200-400%+) to the normal retail price of electronics and furniture. It's a controversial space, but one that seems here to stay - people in a pinch (or who really have short-term furniture needs) need the flexibility, and people who always want to have more than they can really afford will always be lured in by the idea of "low" weekly payments for electronics they could otherwise never afford.

Moreover, the valuation here is interesting. The company has a long-term free cash flow margin of just under 9%, and a long-term book value growth rate of about 8%. Although the return on invested capital is below my normal double-digit cutoff, 8.3% is not terrible. The company is trading just a bit above book value and carries a sub-6 EV/EBITDA.

When I model this out, all it takes is low single-digit free cash flow growth to get a price target of $32, and that's with a 12% discount rate

The down-side:
I have long had some issues and concerns with this company. I will grant that the RTO industry is itself seen as shady by a lot of people, but RCII has not helped its own case. The company has had numerous court rulings go against it over the years, as well as settlements along the way. Allegations have ranged from unsavory collections practices to incomplete disclosure in the rental agreements to employee mistreatment. When I wrote about negatively this stock for The Motley Fool, I got a lot of emails - mostly supportive emails from current RCII employees. So, if your own employees are cheering and supporting harsh outside criticism, what does that say about the company?

Also, I am wondering how RCII grows further from here. I feel like they have penetrated the market pretty fully, and the company's 10-K's suggest the same. Growth, then, is going to have to come from getting more business out of its existing store base. I am not sure how they do that ... which suggests low-to-mid single digit revenue growth is about as good as it may get. Then again, the company could explore expansion into markets like Mexico. That would be a good move on my part, but I have no idea whether management is considering it. 

Outstanding questions:
Aarons (AAN) seems to enjoy a marginally better reputation than RCII and has a lower store count. Can AAN beat RCII at its own game by offering better customer service?

Can/will RCII clean up its act and be a "good citizen" while still making enough money to appeal to shareholders?

Would a company outside the industry (like Cash America (CSH) or First Cash (FCFS)) consider getting into the rent-to-own business. Would an electronics retailer like Best Buy (BBY) or hhgregg (HGG) ever consider any sort of rental or leasing business? The answer to the second question seems like a very strong "no way", but I am not so sure about the first question ... after all, First Cash did attempt (unsuccessfully) to branch out into the buy-here/pay-here auto sales industry a few years ago.

Bottom line:
This one is both interesting and frightening to me. I do not mind controversial businesses, but I am put off by operators in controversial businesses that do not conduct themselves beyond any reasonable reproach. Clearly, there is plenty of reproach for RCII. That valuation, though, is enticing ... so much so that I wonder what I am missing or overvaluing. It is no great surprise to see "sin stocks" carry a discount, but a 60% discount either means the Street is asleep, or I am missing something.

Again, feel free to chime in!

Disclosure - I own shares of First Cash Financial