Forget the Big Banks, this Financial Stock Could Jump 65%
High unemployment and slow economic growth are hardly conditions under which most companies thrive. But I’ve discovered an industry that is doing just that.
In fact, my favorite stock in this space saw annual sales gains of 8.5% in 2009, 15% in 2010 and 19% in 2011 while many other companies struggled to stay afloat. Earnings have also been on the upswing, with analysts projecting record full-year earnings of $4.95 per share in 2012 — an increase of 15% from last year.
But the story gets even better. In spite of those huge gains in both sales and earnings, shares have actually fallen on the year, currently down 10% (compared to the S&P 500’s 5% gain). Take a look at the spread in the chart below.
That divergence between earnings and movement on the chart has created a rare opportunity to buy a great growth stock at a discount. The company I am talking about is Cash America Inc. (NYSE: CSH), a specialty financial services company with a market cap of $1.24 billion. With big banks restricting access to credit and financial services in the last few years due to economic uncertainty, demand for specialty financial services has surged. And that has played directly into Cash America’s business model.
#-ad_banner-#The company operates in two segments: retail services and e-commerce. Its retail services segment operates a total of 1,080 store locations, with 776 in the United States and another 193 located in Mexico. This group specializes in pawn lending, consumer loans and check cashing services.
Its e-commerce segment consists of its Enova subsidiary, which specializes in online payday lending services, operating in 32 states as well as international markets in Canada, the UK and Australia. Although Cash America is a small-cap stock, it’s one of the larger and leading names in specialty finance.
But just because this stock is unloved by the market right now doesn’t mean it should be ignored. In fact, I think now’s the time to buy for some very good reasons…
Cash America continues to look to Mexico for key growth opportunities. That’s because in spite of major economic gains over the last decade, many Latin American countries remain under-banked, lacking the infrastructure and financial resources to provide sophisticated banking services to its citizens. That creates a huge opportunity for a company like Cash America to quickly set up shop and fill the demand.
The Mexican market is also more fragmented than the United States, so there will be more opportunities for consolidation, operational gains and margin expansion. Cash America has almost doubled its store count in Mexico to 193 in the last five years, but at just 18% of the company’s total locations, this is still an underdeveloped market with plenty of opportunity for growth.
E-commerce will also be a key driver of growth, where Cash America subsidiary Enova provides online lending services. Cash America made a very strategic move into the higher-growth market of online lending in 2006 when it acquired Enova. And that bet is now paying off nicely, with the segment posting a 47% increase in total revenue in its first-quarter results announced April 26. The international story also shows up here, with 91% of that revenue growth coming from abroad. Looking forward, Cash America has filed papers for an IPO spin-off for Enova, so that could provide an opportunity for investors who buy the stock to day to also eventually own shares of Enova as a pure play on electronic lending and financial services.
Cash America is also committed to returning value to its shareholders, announcing a dividend of three and a half cents per share during in its first-quarter earnings release. That doesn’t exactly make the stock a yield hog, but in a world of low-to-no interest CDs and bank deposits, it’s another valuable channel of income.
Risks to Consider: The biggest risk in the pawn and payday lending industry comes from the payday lending side of the business, where several states have enacted legislation making it unprofitable for payday lenders to operate. That drove Cash America’s decision to abandon its consumer lending operations in Arizona, Montana and New Hampshire since 2006. Federal legislators have also enacted bills to cap lending rates to military families. Looking forward, although I think the regulatory risk discount is too high, the legislative actions on the state and federal level underscores how politics affects sub-prime lending.
Action to Take –> Cash America shares are down 10% on the year after falling with the market in April and May. But those declines come on the heels of more upward movement in earnings and estimates, so I don’t think the disconnect will last long. Cash America is growing its business in key international and electronic markets, driving market share and big gains on the income statement. With a forward price-to-earnings (P/E) ratio of just 8.5, well below the 10-year average of 13, returning to just historical valuation while earnings surge implies 65% upside for the stock.