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Pawn Shops A Good Recessionary Plan

Posted: Mar 17, 2009 11:25 AM by Glenn Curtis

Tickers in this Article: CSH, EZPW, TGT, COST, DLTR

Real estate prices have cratered over the last year. The stock market has taken a major nosedive as well. By extension, a major crimp has been placed on many consumers' and investors' abilities to access, save or spend cash. The fact that major retail chains like Target (NYSE:TGT) and Costco (Nasdaq:COST) have been struggling and that deep discounters such as Dollar Tree (Nasdaq:DLTR) are doing so well is evidence of just how tough things are out there.

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Because of this super-sluggish economy, many individuals in need of access to cash may find themselves seeking out alternative sources. Enter: pawn shops like Cash America (NYSE:CSH).

For some, the name Cash America might not ring a bell, but the Texas-based company is no small fry. The retail chain is currently the largest provider of secured non-recourse loans to individuals, with 613 total pawn locations. In addition, Cash America is the majority owner of 112 pawn lending locations in Mexico that operate under the name of Prenda Fácil, according to the company's website.

There are some other things that intrigue me about the company as well, and they generally revolve around earnings.

Earnings Estimates and Valuation
I think the most glaring thing about this situation is that the company is expected to earn $2.97 a share in 2009 and a hefty $3.43 a share in 2010 - that implies a 15.5% expected rate of growth. That growth rate is even more head-turning in my book because the company trades at a lowly 4.9 times the current year estimate and at roughly 4.2 times the current 2010 estimate. (To learn more about stocks with a relatively high expected growth rate, read Steady Growth Stocks Win The Race.)

Just as a reference, Texas-based EZCorp (Nadsaq:EZPW), which sports nearly 300 pawn stores, is expected to earn $1.52 per share in 2009 and $1.76 per share in 2010. That's a 15.8% expected rate of growth, although the shares are just slightly more expensive from a price versus expected earnings perspective. EZPW presently trades at 7.2 times the current-year estimate and at about 6.2 times the 2010 estimate.

Coming Out Early in the Game
In late January, in conjunction with its fourth-quarter earnings release, the company offered the following: “At this time, management confirms its previously-reported expectation - as announced on January 20, 2009 - that its fiscal year 2009 earnings per share will be in the range of between $3.10 and $3.30.”

I have to tell you that I consider this a big deal for two simple reasons. No.1, that's a decent earnings future, given analyst expectations. No.2, I'm happy that management came out so early in the game and offered the estimate. In my mind, management could have either given a much wider range of guidance or held off giving full-year guidance altogether. This is a sign of confidence, as far as I'm concerned. (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

The Bonus
In its fourth-quarter earnings release, Cash America indicated that its board declared a 3.5% dividend. That means the forward yield is about 1%. That's not huge, and dividends aren't guaranteed down the line, but in my mind it's a nice little bonus.

Bottom Line
A sluggish economy will cause Americans to frequent pawn shops more often than they do now. My interest is also piqued by the company's and analysts' expectations for earnings in 2009 and I believe Cash America shares are headed even higher.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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