FirstCash Seeing A Strong Core Pawn Recovery, But Point-Of-Sale Is Lagging

It took some time, but FirstCash (NASDAQ:FCFS) is definitely seeing a recovery in its core pawn operations, as high inflation is pinching disposable income for its core customer base. At the same time, though, retail partners for the company's lease-to-own operations (the American First Finance acquisition) are seeing lower foot traffic and gross origination volumes haven't impressed me all that much so far.

At this point, I remain concerned that the AFF deal will drag on results in the near future, though I do still see the logic of entering the point-of-sale financing/lease-to-own business with an asset-light model. I also still expect some lag in the performance of the Mexican pawn stores relative to the U.S. operations, and I continue to believe that expanding the Latin American store footprint would be a good use of capital.

Between a better outlook for the core pawn operations and a weaker outlook for the POS/LTO operations, my model and valuation don't change all that much. I continue to believe that FirstCash shares are undervalued and worth considering, but I also acknowledge that the AFF acquisition has added execution/capital allocation risk to the story, and some investors may prefer other plays on themes like inflation and lower-income consumers.

 

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FirstCash Seeing A Strong Core Pawn Recovery, But Point-Of-Sale Is Lagging

FirstCash Navigating A Sluggish Latin American Recovery And Uncertainties Around A Major New Acquisition

 

It’s been a little while since I’ve covered FirstCash (FCFS), and quite a bit has happened since then, including evidence (at last) of a strong recovery in the U.S. pawn market, a more disappointingly sluggish recovery in Mexico, and a major acquisition (American First Finance, or AFF) and entry into new markets (lease-to-own and other credit products).

To be honest, I’m not at all sold on the AFF deal. I can see the appeal, but I think the capital could have gone to expanding the Latin American pawn operations in countries like Colombia and Peru. That said, it does offer another potential source of growth and cash flow and diversifies the business somewhat (only “somewhat” given similar clientele).

FirstCash shares are down slightly since my last update, and at this point, I believe the shares are priced to generate an attractive long-term double-digit annualized total return. That said, I would think that the Street might need a little time to get comfortable with AFF and, likewise, may want to see signs of a stronger recovery in Mexico before really bidding the shares up again.

 

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FirstCash Navigating A Sluggish Latin American Recovery And Uncertainties Around A Major New Acquisition

FirstCash On A Recovery Trajectory, With Attractive Long-Term Opportunities

 

The last year and a half has been especially challenging for FirstCash (FCFS), as this high-quality pawn lender has seen a downturn unlike any other before. While the pandemic drove exceptional demand in its U.S. retail operations, the combination of strict lockdowns in Mexico and heavy government support in the U.S. played havoc with the pawn operations. With second quarter results things still aren’t back to normal, and elevated uncertainties remain, but operating conditions are on a much healthier footing.

Relative to my last update, the shares have not performed particularly well, but then neither have companies with similar customer bases and drivers like Aaron’s (AAN), EZCORP (EZPW), or Western Union (WU); World Acceptance (WRLD) has done notably better, but I don’t follow that one closely enough now to explain that one.

I continue to like the long-term opportunities in front of FirstCash, including high-margin, FCF-generating U.S. stores with further consolidation opportunities and higher-growth stores in Latin America, and I continue to believe these shares can generate a high single-digit to low double-digit annualized return with near-term to around $90 as the business re-accelerates into 2022.

 

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FirstCash On A Recovery Trajectory, With Attractive Long-Term Opportunities

FirstCash Likely Past The Worst, And The Long-Term Growth Potential Comes Back Into Focus

 

Pawn shop operator FirstCash (FCFS) is still in for a few more rocky quarters, but recent data from the company do support the idea that pawn loan demand is bottoming out. It’s going to take time to rebuild retail inventories and pawn loan balances, but the arrow is pointing up and I expect the story to once again shift toward the long-term growth opportunities ahead of the company in Latin America.

As is often the case, the share price has moved ahead of the actual improvements in reported numbers. Up about a third from my last update, I can’t say that the Street is ignoring or avoiding this name now. Still, assuming the company can get back on a trajectory to mid-single-digit growth (relative to pre-pandemic norms), the shares do still offer solid upside on the basis of improving cash flow generation in the U.S. operations funding more dividends and buybacks and a long growth runway in Latin America outside of Mexico.

 

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FirstCash Likely Past The Worst, And The Long-Term Growth Potential Comes Back Into Focus

FirstCash Likely Stuck Until Originations Improve

The fourth quarter was another rough one for FirstCash (FCFS), as the combination of pandemic-related restrictions and government stimulus (in the U.S.) continue to pressure demand for the company's high-margin pawn loans. Activity improved less than I'd expected, and the share price performance was likewise underwhelming - improving less than 10% from my prior update on the company.

Wall Street typically discounts business performance improvements, with the shares moving ahead of reported numbers, but the combination of weaker pawn loan originations and cautious (if not negative) guidance have pushed the recovery story out again. FirstCash shares do look undervalued on a long-term basis, but I expect that investors will need more confidence on the pawn loan origination outlook before coming back to the name.

 

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FirstCash Likely Stuck Until Originations Improve

FirstCash Struggling Through A Different Kind Of Downturn

Past cycles have shown FirstCash (FCFS) to be a relatively solid countercyclical performer, but every downturn has its own unique aspects, and this downturn has created some real challenges. Pawn loan demand has deteriorated more than expected, with U.S. demand impacted by higher levels of government support, and Mexico’s economy is in tough shape. With that, the shares have noticeably underperformed.

FirstCash has had significant pullbacks in the past, though, and I believe this is still a long-term buying opportunity. The retail operations have held up relatively well, with good execution, and there is evidence of an upturn in pawn loan demand that I expect to continue/accelerate in 2021. Longer term, while new fintech alternatives will be a competitive factor, FirstCash’s core pawn lending services will still be needed by under-banked customers in both the U.S. and Latin America and I expect a double-digit annualized return from these levels.

 

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FirstCash Struggling Through A Different Kind Of Downturn

FirstCash Undervalued Amid Exceptional Operational Uncertainty

I’m not sure who said it, but I’ve long loved the quote, “History doesn’t repeat itself, but it often rhymes” (the quote is often attributed to Samuel Clemens, but it’s disputed). No two recessions are ever the same, and while recessions are often relatively good opportunities for pawn shop operator FirstCash (FCFS), this Covid-19 outbreak and the ways governments are responding to it are creating some new challenges.

I don’t expect 2020 to be a good year for FirstCash; I wasn’t expecting that before, and I’m expecting a worse outcome now. I do think that business will improve in 2021, though, as elevated levels of unemployment and tighter consumer credit will play to the company’s strengths. FirstCash’s leverage, currency risk, and general business risk make this a more challenging name, but I believe the discount to fair value is too wide now.

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FirstCash Undervalued Amid Exceptional Operational Uncertainty

FirstCash Doing Pretty Well Through A Challenging Period

There was no reason to expect FirstCash’s (FCFS) fourth quarter to be strong, as management had warned investors about the impacts of curtailing the consumer lending business (payday lending) and social programs in Mexico that were impacting pawn loan demand. While I wouldn’t call the results “strong”, I think they do demonstrate that FirstCash management is able to effectively manage the company through both the boom times and the challenging times, neither of which last forever.

FirstCash shares have recovered from their lows but still appear to offer double-digit upside on a long-term discounted cash flow basis. The U.S. operations will be a cash cow, generating cash for dividends and buybacks, while the company continues to reinvest the cash flow generated by the Latin American operations into further store growth across the region. All told, while this is a stock with above-average risk, I think it’s a name worth considering.

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FirstCash Doing Pretty Well Through A Challenging Period

FirstCash Stumbles On A Slower Near-Term Growth Outlook In Mexico

I’ve said several times in the past that FirstCash (FCFS) is a “second chance stock”; the inherent volatility of the business, magnified by financial leverage and “market leverage” (a higher risk premium) often leads to pullbacks that while not precisely predictable, have nevertheless been pretty consistent over the years. The post-earnings drop after third quarter results looks like another such opportunity.

Weak same-store pawn loan growth is something that shouldn’t be ignored, but I believe the underlying performance of the U.S. operation is improving, and I think the pressures on the Mexican operation are only a short-term issue. With a prospective annualized return now back in the double-digits, I think this is a name for more risk-tolerant investors to consider again.

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FirstCash Stumbles On A Slower Near-Term Growth Outlook In Mexico

FirstCash Keeping The Throttle Down On Strong Long-Term Opportunities In Latin America

Up more than 40% on a year-to-date basis (and up about 16% over the past year), there’s not much to complain about with FirstCash (FCFS). The integration of Cash America is gradually producing better results in the U.S. store base, and the Latin American operations continue to grow well as FirstCash benefits from serving an underbanked customer base.

It’s harder to recommend these shares, though. I do see a long runway for growth in Latin America – Mexico isn’t fully penetrated, Colombia is barely penetrated (by FirstCash), and Peru is one of many untapped markets – but a lot of that growth potential appears in the share price now. These shares give investors plenty of second chances, though, so those investors who regret missing the bus may want to wait for one of those eventual pullbacks to add shares.

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FirstCash Keeping The Throttle Down On Strong Long-Term Opportunities In Latin America

FirstCash Posts Better Results On Accelerating LatAm Growth

After a disappointing fourt quarter, FirstCash (FCFS) restored some of its growth luster with a better set of first quarter results that included an acceleration of growth in the Latin American store base and improved margins in the U.S. stores. FirstCash remains a solid play on the Mexican consumer and a somewhat countercyclical play on the U.S. economy, though the risk of regulatory changes and new fintech competition shouldn’t be excluded.

At over 14x forward EBITDA, FirstCash shares look more like a solid hold than a clear-cut buy today given where the valuation is. That said, the arrow is moving in the right direction with respect to the underlying momentum in the business, which is why I’m willing to hold on even if discounted cash flow modeling suggests suboptimal returns.

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FirstCash Posts Better Results On Accelerating LatAm Growth

Margin Improvement Should Prolong The 'Slow Burn' FirstCash Growth Plan

FirstCash (FCFS) isn’t really a flashy growth company anymore, but the combination of a healthy growth runway in Latin America and improving margins in the cash-generating U.S. business is still a basically attractive one to me at the right valuation. With the shares priced for high single-digit to low double-digit annualized returns and the company well-positioned for the next economic slowdown in the U.S., my opinion is still that this is a “good, not great” idea for investors willing to take on a little risk and looking for a way to play the large consumer finance opportunity in Mexico and Latin America.

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Margin Improvement Should Prolong The 'Slow Burn' FirstCash Growth Plan

FirstCash In A Lull, But This Should Be A Pause That Refreshes

Third quarter results from FirstCash (FCFS) were okay, but don’t suggest a particularly powerful surge or shift in operating performance anytime soon. That’s okay though, as I believe management is making several modest “course corrections” that will keep the company on a trajectory for healthy long-term growth. The U.S. operations remain a good source of cash flow with further improvement potential in the Cash America store base, while Mexico and Latin America continue to offer a long-term runway of exceptional growth potential with relatively few major competitive threats.

Valuation is still a mixed bag. I think my long-term estimate of mid-single-digit revenue growth (and low double-digit FCF growth) could have some upside, but I don’t want to make the mistake of overstating/overestimating the growth potential of Latin America as the Mexican business and matures, nor the impact of the slower-growing U.S. business. Still, with a total potential annualized return of around 10%, this isn’t a bad buy-and-hold idea.

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FirstCash In A Lull, But This Should Be A Pause That Refreshes

FirstCash's High Valuation Bites The Stock As Operations Show A Few Hiccups

I’ve owned FirstCash (FCFS) for a long time (over a decade now), and over that time I’ve learned that this is a business that runs in streaks – operations will hum along nicely for multiple quarters, beating estimates and supporting a strong stock, and then the company will run into a few hiccups that hit the numbers and the stock before things get back on track. While second quarter results weren’t bad, they weren’t really any better than expected and there are a few concerns coming out of the quarter that investors will need to watch.

Given the high valuation on FirstCash shares and the apparent end (at least short-term) of beat-and-raise quarters, I’m not surprised the shares sold off after earnings. I still wouldn’t call the valuation a particular bargain, but I’m content to hold on the basis of what I expect will be high single-digit returns (based upon discounted cash flow) and the potential for expansion into Colombia and Peru to accelerate growth in a few years’ time.

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FirstCash's High Valuation Bites The Stock As Operations Show A Few Hiccups

FirstCash's Balanced Growth/Value Model Continues To Work

FirstCash’s (FCFS) headline results don’t look all that impressive, but there good things going on with this large pawn lender. The company’s Latin American operations continue to generate strong growth, while the integration of a large U.S. acquisition is on pace to generate better margins and cash flows in the years to come. At the same time, lending options for FirstCash’s core customer base continue to remain relatively limited, giving the company a good addressable market to drive future growth. 

FirstCash shares have done a little better than I’d expected, but I continue to believe there’s a reasonable trade-off in place between risk and reward. Although I do not believe that the shares are shockingly cheap, I believe the prospect of high teens EPS growth and high single-digit long-term FCF growth can support a decent return.

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FirstCash's Balanced Growth/Value Model Continues To Work

FirstCash Continuing To Make Steady, Value-Creating Progress

Leading pawn store operator FirstCash (FCFS) continues to reap the benefits of a disciplined strategy for building out its fast-growing Latin American operations and simultaneous turning around and integrating the acquired operations of Cash America in the U.S. business. That has not only shown itself in improving underlying financial results but also a higher share price, with the stock more than 70% higher than it was a year ago (versus a 36% rise in its only real publicly-traded comp, EZCORP (EZPW)).

I'm a long-term FirstCash shareholder, but it's hard to argue that FirstCash is significantly undervalued today. A more benign USD/MXN exchange rate could certainly help some, the Cash America stores could start contributing positively more quickly than I expect, and/or the LatAm expansion could be even more successful than I expect, but I think the share price is pretty close to where it ought to be considering the growth potential and the operational risk.

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FirstCash Continuing To Make Steady, Value-Creating Progress

FirstCash Looking Forward To Value-Creating Opportunities

FirstCash (FCFS) shares have done well since my last update in August, with the shares rising about 14% as the company continues to execute very well with its Mexican pawn stores. Looking not all that far ahead, the company should start reaping the benefits of integrating its Cash America stores and converting them to FirstCash’s more sophisticated and efficient IT system as well as expansion into a new Latin American market (Colombia).

Valuation is more of a challenge for me now. I’m very willing to acknowledge that there’s no end-all/be-all approach to valuation, and the market is often happy to overpay for growth, but the risk/reward ratio now is more in keeping with a good hold than a “must buy.”

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FirstCash Looking Forward To Value-Creating Opportunities

FirstCash Management Has Several Opportunities To Execute And Drive Value

When I last wrote about First Cash (FCFS) in October of 2016, I thought the shares offered good value despite some elevated risks. The shares have since risen around 25%, helped in no small part by a stronger Mexican peso and a solid recent trend in consumer health in Mexico.

Looking ahead, there are multiple areas where management could add value, but the move in the share price makes execution on these items much more critical for ongoing outperformance. Organic expansion into Colombia is likely to be measured at first (though management would like to acquire if possible), and the process of wringing synergies from the Cash America deal is not likely going to show much until 2018 at the earliest. First Cash shares should still be able to generate double-digit total annual returns from here (provided the company hits my high single-digit FCF growth target), but this remains a riskier-than-average name with significant exposure to Mexico's economy and currency.

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FirstCash Management Has Several Opportunities To Execute And Drive Value

A Respectable Start For The New FirstCash

The value of the First Cash-Cash America merger was never going to be established in just one quarter, but FirstCash (NASDAQ:FCFS) does seem to be off to a decent start, and it looks as though the U.S. business could be stabilizing. Meanwhile, the Latin American business continues to grow nicely, and the company will soon be taking its first steps into South America.

I'm still concerned that the U.S. market isn't going to offer much long-term growth, but I do believe FirstCash can achieve worthwhile operating synergies from the merger and use the relatively rich cash flow streams to fund growth initiatives in markets more promising for growth. I'm adjusting my model slightly to account for the third quarter and management's guidance, and my fair value of $55 still offers worthwhile upside if I'm right that the U.S. business will chip in low growth and good cash flow, while the Latin American business continues to grow nicely.

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A Respectable Start For The New FirstCash