Tough Times Pay at This Company

08/15/2011 9:30 am EST


Charles Carlson

Editor, DRIP Investor

It’s a hard fact that there are businesses that find profit in others’ loss, whether it’s a funeral home or body shop...and in this economy, this stock is set to prosper, notes Charles Carlson of DRIP Investor.

Tough economic times and a lousy job market are usually not a recipe for business success.

Don’t tell Cash America International (CSH). The company, a leading provider of pawnshops and cash-advance outlets, has seen its profit and revenue rise nicely in the last several quarters. Record sales and profits are expected in 2011.

Cash America and other companies in this space are always concerned about the specter of increased regulations on pawnshops and cash-advance businesses. However, for investors willing to accept above-average volatility, these shares have appeal.

Cash America International offers specialty financial services to consumers, including more than 780 lending operations in 23 states under the names “Cash America Pawn,” “SuperPawn,” “Maxit,” “Pawn X-Change,” “Cash America Payday Advance,” and “Cashland.”

The company operates more than 180 pawn-lending locations, of which the company is a majority owner, operating in 21 jurisdictions in central and southern Mexico under the name “Prenda Fácil.”

The firm operates another 112 franchised and six company-owned check-cashing centers operating in 18 US states under the name “Mr. Payroll.” Cash America also offers consumer loans over the Internet in 30 states, as well as internationally.

The combination of high unemployment and a cautious lending environment by banks has fueled big demand for Cash America’s services. Per-share profits rose 27% in the June quarter on a 14% increase in revenue.

One factor helping results is the price of gold. Articles made from the precious metal tend to be collateral put up by Cash America’s customers. Thus, the rising price of gold increases the company’s ability to make larger loans on which they earn interest. Higher gold prices also drive higher scrapping revenues, and boost retail revenues.

To be sure, Cash America stock has been quite volatile over the years. The shares went from nearly $49 per share in 2008 to under $12 in 2009.

One reason for the volatility is that regulatory moves at the state level to limit fees and interest rates on cash advances and short-term loans can impact margins, and even cause Cash America to shutter operations in those states. Given the increased regulatory mindset in Washington, it is a valid concern for these shares.

Cash America has done a good job of addressing these concerns by expanding internationally, especially its e-commerce activities.

Analysts expect Cash America to earn $4.27 per share in 2011 and $4.94 per share in 2012. The stock currently trades at 13 times the 2011 consensus earnings estimate, not dirt cheap but reasonable for a stock showing good growth. The issue provides the added kicker as a “gold play.”

The stock doesn’t pay much in the way of a dividend yield—about 0.2%—but these shares should put up decent capital gains over the next 12-24 months. Please note that Cash America offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company.

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