The contradictory titled Cash America International (CSH) is considered a credit service industry and typically tied to payday loans. Over the last several years the payday loan industry has faced increased scrutiny and regulations. Many states have passed laws reducing the rates below a sustainable amount given the high default rates. As a result many payday lenders have had losses for the last several years as they shut down offices in these states. Now federal agencies, in particular the US’s Consumer Financial Protection Bureau (CFPB) and UK’s Financial Conduct Authority (FCA), have taken on the payday loan industry. You can see the CFPB white paper here and the field hearing (town hall) is here. From the paper, it appears that 30-60% of all loans are paid or defaulted in the first sequence of loans given and a majority of customers extend their loans for long sequences of time. The focus of this white paper is only on these payday loans, although some testimony in congress suggests they have considered non-payday loan regulations as well; however, this was not discussed in any of the sample language provided to date. The concern of the CFPB appears to be people continuing to renew at greater amounts, thus finding themselves unable to get out of debt.
The UK has just passed regulation, which restricts the loan amount from becoming more than double the original loan and how lenders can advertise. FCA predicts this will reduce the payday loan industry by 40%. There were no restrictions on the rollover of loans, which the CFPB was fixated on. CSH has predicted investors should see the impact of the FCA regulations during the second half of 2014. They are also opening an office in London (previously only operating online there) as a sign of good faith as they work with FCA on ensuring compliance. The limitation on continuation of the loan will most likely only be limited until consumers realize they can switch companies to perpetuate the loans for longer time periods. If that occurs, there will be little change in loan volume industry wide.
| Revenue | 6/30/14 TTM/ Shares | 6/30/14 TTM | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 |
| Retail | ||||||||
| Pawn Fees | 9.83 | 324,334 | 311,799 | 300,929 | 282,197 | 243,713 | 231,178 | 184,995 |
| Merchandise Sales | 18.44 | 608,417 | 595,439 | 703,767 | 688,884 | 588,190 | 502,736 | 465,655 |
| Loans | 3.27 | 107,901 | 113,211 | 121,892 | 119,192 | 113,973 | 117,997 | 141,134 |
| E-Commerce | ||||||||
| Short Term Loans | 9.40 | 310,349 | 389,706 | 459,835 | 400,810 | |||
| Installment Loans | 7.25 | 239,099 | 203,924 | 126,202 | 48,054 | |||
| Line of Credit | 8.09 | 266,910 | 170,496 | 73,532 | 30,590 | |||
| 24.74 | 816,358 | 764,126 | 659,569 | 479,454 | 376,979 | 253,859 | 223,469 | |
| Other | 0.30 | 9,898 | 12,651 | 14,273 | 13,337 | 14,195 | 14,620 | 15,541 |
| Total | 31.83 | 1,050,550 | 1,797,226 | 1,800,430 | 1,583,064 | 1,337,050 | 1,120,390 | 1,030,794 |
| Operating Profit | ||||||||
| Retail | ||||||||
| Pawn Fees | 9.83 | 324,334 | 311,799 | 300,929 | 282,197 | 243,713 | 231,178 | 184,995 |
| Merchandise Sales | 5.43 | 179,026 | 184,826 | 225,588 | 241,267 | 205,723 | 178,459 | 170,295 |
| Loans | 2.21 | 72,985 | 79,852 | 92,667 | 95,191 | 96,536 | 96,355 | 107,581 |
| Operating and Administrative Costs | (12.81) | (422,664) | (401,477) | (413,461) | (372,851) | (329,762) | (349,272) | (337,493) |
| 4.66 | 153,681 | 175,000 | 205,723 | 245,804 | 216,210 | 156,720 | 125,378 | |
| E-Commerce | ||||||||
| Short Term Loans | 8.48 | 279,771 | 253,749 | 282,783 | 241,228 | |||
| Installment Loans | 3.75 | 123,786 | 97,137 | 51,020 | 14,431 | |||
| Line of Credit | 5.57 | 183,945 | 98,188 | 37,281 | 22,078 | |||
| 15.25 | 503,377 | 446,230 | 371,084 | 277,767 | 212,022 | 144,685 | 116,299 | |
| Operating and Administrative Costs | (8.73) | (288,247) | (278,505) | (245,005) | (173,121) | (136,170) | (98,784) | (68,861) |
| 6.52 | 215,130 | 167,725 | 126,079 | 104,646 | 75,852 | 45,901 | 47,438 | |
| Other | (0.73) | (24,137) | (57,671) | (40,459) | (51,959) | (41,007) | 14,620 | 15,541 |
| Total | 10.44 | 344,674 | 285,054 | 291,343 | 298,491 | 251,055 | 217,241 | 188,357 |
| Depreciation and Amortization | (2.32) | (76,498) | (73,271) | (75,428) | (54,149) | (43,923) | (41,589) | (39,651) |
| Interest Expense | (1.30) | (42,843) | (36,245) | (28,987) | (25,447) | (22,020) | (20,778) | (15,726) |
| Foreign Currency | (0.04) | (1,173) | (1,205) | (313) | (1,265) | (463) | (158) | (177) |
| Extinguishment of Debt | (0.52) | (17,169) | (607) | – | – | – | – | – |
| Non-Controlling Interest | – | – | (444) | 5,511 | 693 | 158 | (1,258) | (46) |
| Taxes | (0.88) | (29,194) | (30,754) | (84,656) | (82,360) | (69,269) | (56,780) | (51,617) |
| NI | 5.39 | 177,797 | 142,528 | 107,470 | 135,963 | 115,538 | 96,678 | 81,140 |
The income statement goes back to the change in reporting period of operating units. The data from the spin off reporting was used for Enova and the difference from the consolidated reporting was placed in the other section. The per share calculation was based on the 33,000 shares per the spin off.
At first glance this has value investment potential, but the driver for lower value is the regulations described above. The belief is that the pay day lenders will be regulated out of business or at least will have their services dramatically reduced. The evidence of what is being proposed does not support the argument that there is not a viable lending business available. CSH was the target of a CFPB action in November 2013. They discovered the company to have violated regulations in the state of Ohio under a subsidiary they acquired to properly file and review loan documentation in addition to overcharging military personnel. The most damning item is the fact they destroyed evidence prior to the investigation in the Enova entity. The pending management came in after the destruction was ordered and the current CEO is stepping down after the spin off. CSH was ordered repayment to consumers and charged fines totaling $19 million or less an average quarter’s net income. There was similar litigation from Ohio on these issues. Finally, there is a pending settlement for loans that violated lending laws in Georgia, which is estimated by the company at $18 million with a maximum estimated damages of $36 million. These appear to be divisions that were acquired as part of their expansion programs, and not endemic of the company’s overall operating program. Additionally, now that they have been investigated, one can assume this to be the extent of federal investigations for the time being. As they acquire additional chains as a growth strategy; however, potential future litigation should be considered with similar settlement amounts.
| Current Assets | ENOVA/Share | CSH/Share |
| Cash and cash equivalents | 2.42 | 3.87 |
| Restricted Cash | – | 0.00 |
| Pawn Loans | – | 9.01 |
| Consumer Loans, Net | 8.85 | 1.57 |
| Merchandise Held for Sale | – | 6.80 |
| Pawn Loan Fees Receivable | – | 1.78 |
| Income Tax Receivable | – | 0.00 |
| Prepaid Expenses and Other Assets | 0.42 | 0.98 |
| Deferred Tax Assets | 0.78 | 0.31 |
| Total Current Assets | 12.47 | 24.32 |
| Property, Plant and Equipment, Net | 1.15 | 7.43 |
| Goodwill | 7.75 | 15.39 |
| Intangible Assets | 0.00 | 1.68 |
| Other Assets | 0.68 | 0.45 |
| TOTAL ASSETS | 22.05 | 49.26 |
| Current Liabilities | ||
| Accounts Payable and Accrued Expenses | 1.89 | 1.98 |
| Consumer Deposits | – | 0.63 |
| Total Current Liabilities | 1.89 | 2.61 |
| Long-Term Debt | ||
| Deferred Tax Liabilities | 1.48 | 2.20 |
| Other Liabilities | 0.00 | 0.04 |
| Long-Term Debt | 14.97 | 10.25 |
| Total Liabilities | 18.34 | 15.10 |
| Stockholders’ Equity | ||
| Common Stock | – | 0.10 |
| APIC | – | 2.95 |
| Retained Earnings | 3.52 | 33.03 |
| Accumulated OCI | 0.19 | 0.06 |
| Treasury Shares | – | (1.98) |
| Total Stockholders’ Equity | 3.71 | 34.16 |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | 22.05 | 49.26 |
Additionally, CSH has taken steps to reduce its dependence on short term loan revenues, but is now deciding to take that one step further by spinning off the online loan business. This will have CSH be a pawn shop with some loans given at their store locations, along with check cashing and other bank like services.
The projections for normalized earnings in the next year that would reduce all the pawn shop loan business by 70% and minimal growth in the pawn operations, which leaves EBIT of 3.18/s and NI of 1.61/s assuming average expenses and 600 for foreign currency. This new pawn show business would tepidly earn EBIT/(NWC+FA) of 10.9%, ROA of 3.3%, and ROE of 4.7%. There is still room for controlled growth through their acquisition strategy and management’s comments of focus on the retail side of the business through inventory turnover, margins and same store sales would leave some room for improvement, which is ignored in this analysis. The lower returns might justify a 17 multiple of P/E (a discount to comparable FCFS, who is 19.89), making the stock worth $27.37. This is lower than the only comparable found of First Cash Financial Services (FCFS), which operates in the US and Mexico, like CSH.
The remaining speculative, high growth, high return business of online loans, now called Enova International, valued at 16.95 based on above. The business can quickly move locations to best maximize profits due to its online presence and have already started experimenting with non-English speaking countries. Run by a CEO that sold optionsXpress to Charles Schwab, this company has focused on installment loans and lines of credit to grow their business. Taking the same 70% hit to short term loans, but allowing the other loans to grow at current rates would leave a business with a projected EBIT/(NWC+FA) of 37.7%, ROA of 9.2% and ROE of 54.6%. Assuming this stellar performance deserves a P/E of 20x, then the value of Enova at $40.52. This combined give a current value of $67.89 and a gain from current value of over 50%. Please do your own analysis and review for the suitability of these projections.