Monday, May 14, 2018

A current AIM Program Small Cap Equity Holding: FirstCash, Inc. (FCFS-US) by: Robert Dickey. "First Cash with FirstCash: Time to Harvest?"


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FirstCash, Inc. (FCFS-US, $87.75): “Fast Cash with FirstCash: Time to Harvest?”

By: Robert Dickey, AIM student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

FirstCash, Inc. (NYSE: FCFS-US) operates retail-based pawn stores within the U.S. and Latin America. Business segments include pawn operations and consumer lending services. The U.S. operations segment makes up approximately 62% of revenues and the Latin America operations segment constitutes 38%. FCFS was founded in 1988 and is headquartered in Arlington, TX.

• Strong 2018 Q1 performance at first glance. Q1 EPS of $0.90 beats by $0.15. Revenue of $449.8M beats by $2.73M.

• 15% decline in pre-tax operating income in U.S. operations. 23% increase in pre-tax operating income in Latin operations (adjusted on constant currency basis).   

• Pawn loan fees up 17% (adjusted on constant currency basis) in Latin America and down 5% in the U.S.

• Added 140 locations in Latin America and the U.S. since March 2017.   

• Quarterly dividends increased to $0.22 per share.

Key points:

FirstCash, Inc. is on track for a strong 2018 performance if the company can get a handle on operations in the United States. Management seems to place an emphasis on growth in Latin America evident by the addition of 50 pawn-shop and consumer loan locations compared to 3 additions in the U.S. segment (during FY17). Total revenues for Q1 2018 are up only 0.5% compared with Q1 2017. Costs of revenue have increased 3% - reducing gross margin. Total pre-tax income increased slightly thanks to reduced depreciation and administrative expenses YoY. Net income increased thanks to reduced income taxes due to corporate tax reform.

2017 revenues increased nearly 64% due in large to the Cash America merger and Maxi Prenda acquisition in 2016. Management does not disclose specifics for organic vs. inorganic growth in their 10-K, but they do offer growth numbers for same-store sales and fees. U.S. operations show Legacy First Cash same-store pawn loan fees increased 4%, however, legacy Cash America same-store pawn loan fees decreased 9% during FY17 compared to FY16. Same-store retail sales decreased both in legacy First Cash and legacy cash America stores 1% and 4%, respectively. Latin America same-store loan fees and retail sales both increased 12% on a constant currency basis. However, it is important to note that 62% of revenues are derived from U.S. operations.

While three locations were added to the U.S. during FY17, 10 locations were closed or consolidated. This would be fine if the company were becoming more streamlined as a result – however, FY17 gross profit has decreased to 35% from 37% in FY16. Also, pre-tax operating margin for FY17 was 20% compared to 23% in FY16.   

What has the stock done lately?

FCFS was added to the AIM Small Cap portfolio in December of 2017. When pitched, the price sat around $66 per share. Presently, the stock trades around $87 per share. This makes an incredible upside of more than 30%.

Past Year Performance: FCFS has seen remarkable returns for investors. FY17 EPS was $3.01 vs. $1.72 in FY16. The stock price has seen a return of approximately 76% YoY from the most recent quarterly report.

1 Year Stock Chart vs. Benchmark (Russel 2000 Index)
Source: FactSet

My Takeaway:

After a year that saw the stock price shoot through the roof, it is hard to say that there is any upside left in FCFS. After further analyzing the financials, it appears that operations in the U.S. are declining enough to degrade total company performance despite strong performance in Latin America. It appears that things fell into place perfectly for FCFS to report the numbers it did for Q3 2018. The peso is growing in value and is expected to continue this trend according to Bloomberg, but this won’t continue forever. The company can keep an aggressive acquisition strategy, but if management does not get a handle on margins, the quality of earnings will remain poor and the market may begin to realize this.  

1 Month Stock Chart
Source: FactSet

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