$FCFS. Long pawn shops. DD inside.

by Goldmans_Sach

no strike or exp given low liquidity. sorry boys, this is a boring, plain old stock play

i have a lot of notes but just going to hit the highlights here, i welcome any thoughts from anyone who knows the industry tho.

business model

— it’s a very simple one: customers are given short-term (30 – 60 days) loans based on the assessed value of a product which they post as collateral (jewelry, electronics, guns, whatever). these loans are super expensive (good for pawn shop), and if they’re unpaid, the collateral is sold at a ~40% markup (great margins).

thesis:

— High unemployment and economic uncertainty will increase demand for pawn loans as consumer credit availability shrinks in a recessionary environment.

— credit risk is extremely limited given modest LTV, 100% collateral loans, and 30 – 60 day credit terms (vs. months – years for subprime lenders). also, collateral from unpaid loans turn to high-margin retail sales — credit risk is really just inventory pricing risk

— $FCFS is down 25% from YTD high and 36% from 2019 high and is poised to break out of ATH in the next few years. however, there’s more room to fall short-term given uncertain timing of reopenings w/r/t COVID-19, liekly additional stimulus, and continued moratoriums on debts/bills/other consumer liabilities

— the stock has been punished in the face of gov’t stimulus, which has reduced demand for pawn loans, and COVID-19 fears. however, long-term, demand for pawn loans should come back strong and 98% of stores actually continue to be open.

what i like

— YTD performance has been great. retail sales are up 30% in April (!!), granted, mostly from products for working-from-home and gaming consoles and the like

— pawn loan business is super high margin and should increase in share as subprime lenders tap out

— domestic units are not mall-based

— positive SSS through ’08 crisis and incredible stock performance coming out of it

— historically a very good operator and integrator. some of the stats on the CashAmerica acquisition are great (e.g., retail margins at those stores increased from 33% to ~40%). this company is very big on inorganic growth so this is really important

— ample liquidity ($80mm cash, $200mm available under RCF, highly liquid inventory) and significant debt capacity under existing credit agreement

— these guys love their share buy backs, and the debt documents are pretty generous in allowing buybacks. program has been temporarily suspended, expect it to come back strong mid-to-post recession (if not sooner…)

what i dont like

— pawn shop market is highly fragmented, low brand equity, low barriers to entry (but also who gives a shit)

— regulatory risk as socialism becomes more popular and negative sentiment towards consumer predatory practices grows

— more stimulus + continued moratoriums on bills reduces demand for pawn loans. i see this as very short term tho.

— LatAm and FX risk. Most LatAm stores are really in Mexico, a market i admittedly don’t know well. the plus side on FX is most foreign cash is re-invested locally, it just translates to lower earnings in USD

TL;DR: companies that make money off poor people will do well in a recession

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.