After experiencing a run on the banks, my grandmother used to keep cash under her pillow. Following the sub-prime mortgage crisis, consumer confidence in banks has remained at all time lows, which resulted in an increasing proportion of people un-banked and under-banked.
Moreover, banks have been unable to serve the needs of certain segments of the population effectively and efficiently. DFC Global Corp (NASDAQ:DLLR), an international provider of diversified financial services such as unsecured short-term loans and secured pawn loans, is a prime beneficiary of this trend. DFC Global’s valuations look attractive at 0.5 times PEG, following a downward revision of FY2013 EPS guidance and concerns over new payday-loan standards.
Who are your customers?
I have a friend who is frugal by nature and does not invest in any luxury stocks simply because he cannot understand why people will actually pay hefty price tags for brand names and the envious stares of onlookers. He will not have a problem with understanding the profile and psyche of DFC Global Corp (NASDAQ:DLLR)’s customers.
I started noticing foreign research associates in one of the Wall Street brokerage reports a few years ago. This is reflective of the increased outsourcing of jobs in developed countries across different industries. Coupled with inflationary pressures, many low-wage workers in developed countries are finding it tough to make ends meet. In particular, the monthly cash inflows they receive from their employers are not timely enough to meet monthly bills and unexpected cash needs. Short-term consumer loans provided by companies such as DFC Global Corp (NASDAQ:DLLR) are the only viable solution to their woes.
Asset-rich customers, who use DFC Global’s pawn-lending services, usually belong to two major categories. The first category of customers are unable to get short-term loans from banks or companies like DFC Global Corp (NASDAQ:DLLR), because they are either unemployed or have a bad credit record. The second category of customers might be any person who works on a “eat-what-you-kill” commission system and has a lumpy income stream. More importantly, pawn lending has faster processing time, lower all-in fees and costs, and does not mar your credit record.
Why is DFC Global the best stock to play this trend?
There are a few reasons why I think DFC Global Corp (NASDAQ:DLLR) is my choice to bank (pardon the pun) on the growth in non-bank financial services for the un-banked and under-banked.
Firstly, non-bank financial services have their fair share of critics. Consumer loans are under pressure from calls for increased payday loan regulations, while some are negative on pawnshops given falling gold prices. In terms of sales channels, some futurists have called the end for all things brick and mortar.
DFC Global Corp (NASDAQ:DLLR) has diversified revenue streams from multiple products (unsecured short-term loans and secured pawn loans ) and multiple channels (bricks and mortar and the Internet). There is no need to place your bet on a single product or single sales channel, when you invest in DFC Global.
Secondly, investors sometimes have a hard time deciding between high-flying growth stars and dividend-paying cash cows. While high-flying growth stars deliver strong growth, it typically comes at the expense of equity dilution or increased credit risk from debt financing. DFC Global Corp (NASDAQ:DLLR) has a mix of both growth plays and cash cows in its portfolio, which creates a self-funding model where cash flow from its mature U.S. and Canada businesses funds growth in its European Internet-lending and pawn-lending businesses.
DFC Global’s peers include Cash America International, Inc. (NYSE:CSH) and EZCORP Inc (NASDAQ:EZPW).
Cash America has the largest pawn book globally, but has shifted its attention to online consumer loans in the past five years. Online consumer loans went from a quarter of its fiscal 2008 revenue to taking up half of its turnover in fiscal 2012.
As the quantum of online consumer loans increased, the geographic mix has also experienced a shift, with revenue from U.S. short-term products only a third of 2008 levels. Cash America International, Inc. (NYSE:CSH)’s online consumer loans business should continue to grow, as more people shop, invest and bank online.
EZCORP Inc (NASDAQ:EZPW) is the second-largest pawn operator globally, after Cash America. However investors seeking a more well-rounded exposure to non-banking products targeting the un-banked and under-banked globally could be disappointed. EZCORP is U.S. and Canada focused, deriving more than three quarters of its earnings from this region.