“This month’s new pick should do well in a weaker economy. First Cash Financial Services, Inc. (FCFS) operates 577 pawn and consumer finance stores in seven U.S. states and 20 states in Mexico. The company was founded in 1988 and now has locations in Texas, Washington, D.C., Illinois, Maryland, Missouri, Oklahoma, South Carolina, Virginia and Mexico. The company has a very strong balance sheet and cash flow. They also have significant expansion opportunities.
“There’s a growing demand for this type of business because a pawn shop is focused on a niche market providing small, non-recourse loans. About 30% of the U.S. population and 70% of Mexico’s need pawn shop services. The average pawn loan is $75 in Mexico and $170 in the U.S. The typical monthly service charge is 15% to 20% (state regulated) and more than 70% of loans are repaid, while forfeited collateral (often jewelry, electronics and tools) is typically sold at retail margins of 40% to 45%. Earnings per share have grown at 23% annually since 2006 and do not show any sign of slowing. The company expects to open 60-70 new stores in Mexico during 2011. I expect earnings of $2.20 this year and $2.65 in 2012. Applying a P/E ratio of 20x makes my 12-18 month target price $53.00.”
Eric Dany, Stock Prospector, 6/7/11