Sunday, May 6, 2018

A current AIM Program Small Cap Equity Holding: FirstCash, Inc. (FCFS) by: John Wagner. "It Ain't a First for FirstCash"

FirstCash, Inc. (FCFS, $81.85): “It Ain’t a First for FirstCash”

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.


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.

 Source: FactSet
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