-->
By: John Wagner, 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) operates
retail-based pawn stores throughout the United States (62% of revenue) and Latin
America (38% of revenue), primarily targeting unbanked and underbanked
customers. Revenue is created primarily from pawn and consumer loans collateralized
by pledged personal property, pawn service fees, and the buying and selling of
merchandise.
•
FCFS is continuing to expand their presence in the Latin American market where
more than 60% of the population is unbanked. FirstCash is currently operating
with double-digit same-store sales growth and loan balances. This growth is
expected to continue into 2019 with margins 2% higher than the U.S. locations.
•
The market for acquisitions and
expansion continues to look stable for FCFS. There are nearly 30 US-based
private pawn shops controlled by financial or private equity firms that may be
acquired for continued market share increase. The merger with Cash America
continues to look bright as lower First Cash loan-to-value standards, POS
systems and compensation plans have been implemented in all merged stores.
•
FirstCash has increased annual dividend to $0.88 per share beginning 1Q18, up
16% from 1Q17. FCFS also expects to complete a $100 million dollar share
repurchase plan throughout 2018, adding on to the 1.6 million shares
repurchases during 2017.
Key points: FirstCash continues to prove as a stable business
generating close to 20% YoY EPS growth over the last two years. These margins
will continue to stay these ways as the Cash America merger will begin to
recognize revenues at the FCFS operating margin of around 13.5% as opposed to
9-10%. Due to implementing FCFS POS systems, loan-to-value, and underwriting
standards, these margins should reach the 13% by 2019. If they can reach FCFS
historical profit margins, they will continue to grow at similar rates.
Latin
America is perhaps the most promising of drivers for FCFS, given its fourth
quarter revenue increased 22% prior to last year. This increase came because of
a 19% increase in lending fees and merchandise sales. A big boost in revenue
came from their Maxi Prenda acquisition is 2016, that recognized an increase in
retail sales of 48%. Maxi Prenda was one of the first stores to have
implemented the FirstPawn software and standards. If future acquisitions in
this area can be as successful as Maxi Prenda under implementation of their own
software, earnings will continue to grow in the LatAm segment.
While
there are many positives with FCFS, I do want to note the risks related primarily
to currency exposure. The peso is currently trading at 18.77 by the end of
2Q18, whereas management has guidance inferring it will trade around 20. Given
the continued strength of the U.S. economy and the rise of interest rates, it
is expected that the peso value will fall, it is just a matter of how much. A
100bps change in the peso to U.S. dollar could hurt FCFS earnings by as much as
$0.10 per share. Given the outlook of the value of the peso, this is the
largest risk involving FCFS.
What has the stock done
lately?
Since
being added to the fund in December 2017, FCFS beat Q4 earnings estimate of
$0.94 by $0.10. The firm also beat revenues of $480.2M by $13.93M, representing
an increase of 4% compared to 4Q16. In the last 3 months, the stock has risen
nearly 13%, representing a steady increase with a momentum hike from its
earnings beat.
Past Year Performance: Following a major merger with Cash America
in 2016, FCFS recognized nearly $45M in cost synergies and $19M in depreciation
savings by the end of 2017. Revenues increased by 63% over the last fiscal
year, with EPS increasing by nearly 18%. The stock price has increased 57% over
the course of the year and has potential to continue to its momentum in the
distant future.
My Takeaway
I
believe that FCFS has a steady runway for growth for a variety of financial
reasons, but primarily because it is being run by superb and experienced
management. Daniel Feehan, Chairman, has been in the pawn business for over 25
years. Rick Wessel, CEO, has been in the pawn business for nearly 30 years,
with all of them having been served with First Cash. I also believe that the
advancement and expansion in Latin America provides a steady and promising
runway for growth given that 60% of the population is unbanked and FCFS only
holds about 14% market share. Many other competitors besides ENVA are private
or small retailers, meaning they may even be potential takeovers for FCFS in
future. Lastly, I believe that the tax reform will free up cash for both FCFS
and its customers. FCFS has placed emphasis on continuing to repurchase shares
and given extra cash with a lower tax rate, there may be more to come. Due in
part to the tax reform and consumer confidence, consumer spending is expected
to continue to increase which will also be an additive to earnings for future.
I truly believe that FCFS is in a great position financially and economically.
Given that FCFS has reached its price target of $80, it still has room to grow
in the future. Therefore, I recommend a hold on FCFS for the AIM Domestic
Equities Fund.
Source:
BloombergMarkets
