Investment Jungle

The next stock to come up in my Rule #1 screen is First Cash Financial Services (NASDAQ:FCFS).

Company Profile:

From Yahoo Finance:

First Cash Financial Services, Inc., through its subsidiaries, provides consumer financial services and related specialty retail products through pawn stores in the United States and Mexico. Its pawn stores engages in providing small consumer loans; advancing money against pledged tangible personal property, such as jewelry, electronic equipment, tools, sporting goods, and musical equipment; and retail sale of previously-owned merchandise acquired through collateral forfeitures and over-the-counter purchases from customers; and offer cash advances or a credit services products. The company operates stand-alone cash advance stores that provide a range of consumer financial services products, including cash advances, credit services, check cashing, money orders, money transfers, and prepaid card products. In addition, it operates automobile dealerships that sell used vehicles; and engages in related vehicle financing contracts.

This is a small cap stock with a market capitalization of $808M.

So what we have here is quite the multidimensional business: a pawn shop, payday advances and used car sales. Hmm. Grouping those 3 types of businesses makes sense to me. It conjures up images of seedy businesses.

Financial Analysis:

As usual, we will start at looking at the Big Five. And something that really stands out (as you will see), as the numbers almost seem to come from 2 different companies. The first five years are consistent and the last 5 years are consistent. But these two 5 year periods are not consistent with each other!

Let’s have a look at management. Looking at the Return on Investment Capital, we see low sub 5% returns in the first 5 years. The last 5 years show ROIC in the mid teens! And consistently, so it would seem that they either got new management or the old management got significantly better!

The Return on Equity does not have quite as bad a difference from start to finish. Ten years ago, they were sitting around 8% ROE and progressively improved the ROE to a high of 16.51% in 2006. Good steady progression for the whole ten years.

The equity growth rate has been excellent for 9 out of the last 10 years. The 10 year average is 13.16% and the 5 year average is 15.85%. And over the whole ten years, equity growth rate has compounded at a rate of 12.95%. Not bad considering that the first 5 years did not seem as productive.

Earnings per share growth rate shows a very high, steady climb. Every year except one shows growth rates in excess of 25%. And the earnings per share growth rate has been an astounding 22.61% over the whole ten years.

Sales growth rate has been excellent the last 4 years. And cash flow growth rate has been steady increasing for the last 6 years at double digit rates.

Stock Analysis:

The historical P/E for both the 5 year and the 10 year average both come out in the 14 range. However, today, the stock is trading at a P/E of 23. I prefer to stick with the historical numbers in this case and will assume a P/E of 15.

To determine the EPS growth rate, I look at the equity growth rate. The 5 year and 10 year averages are fairly close: 15.85% and 13.16% respectively. And 2006 came in at 13.77%. For some reason, the analysts have a prediction of 20%. Being conservative, I will go with 16%. Yes, it is higher than the historical numbers show. So I think I am being too generous, but let’s see how the sticker price looks.

Using these assumptions, I came up with a sticker price of $17.34 and being a value investor, I would rather pay 50 cents on the dollar and pay $8.67. Well, from today’s price, that would be a healthy premium of 40.85% over the sticker price and 182% over the MOS price!

Here are my calculations for your review.

Conclusion:

Looking back at just the last 5 years, I would definitely consider this a Rule #1 stock. Although looking back 10 years does concern me, the management definitely seems to have swung the company in a new more profitable direction.

Unfortunately, this stock is currently overvalued. That also shows up in the comparison of the earnings yield with a 10 year bond. The earnings yield is 4.34% and I could buy a 10 year bond that would pay 4.88%. And since I sorted my Rule #1 stock screen in order of earnings yields, none of the other companies on the list will make this cut.

However, if the price of the stock actually fell to its sticker price, then the earnings yield would be 6.11%. So once again, another indicator that this stock is currently overvalued.

But I do think that it is worth putting on the watch list.

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