Jim Cramer’s Stock Picks: $FCFS

Jim Cramer mentions thousands of stocks in his show every year but he analyzes only a small percentage of them in detail. One of Jim Cramer’s latest stock picks was First Cash Financial Services (FCFS). This is a $1.3 Billion company with a trailing PE ratio of 18. Jim Simons’ Renaissance had $24 Million in FCFS and Steve Richman’s East Side Capital had $14 Million in FCFS at the end of March. FCFS gained 8.6% since then, beating the market by nearly 18 percentage points. Here is the transcript of what Jim Cramer said about FCFS:

Jim Cramer

You know it looks like we’ve finally got ourselves some sort of a debt deal. That doesn’t suddenly fix everything else that’s wrong with the US economy; we are still living in a denizen era. Sort of sequel to David Copperfield or maybe a repeat of the gilded age. Where the wealthy are doing just fine, thank you and, everyone else is struggling to make ends meet. Tiffany or cubic zirconium? In other words, for the haves this is a Nieman Marcus economy. But, for the have-nots it’s more of a pawnshop economy. That’s right. The pawnshop business right now is on fire! Thanks to the persistently high level of unemployment and the fact that real banks don’t like lending money to people with lousy credit anymore. Maybe they did at one time but, you know that a lot of people got money that shouldn’t have. Both sides were wrong.

Now these are no longer your granddad’s pawnshops from the great depression. These days pawnshops have become fairly strong retail contenders. Some of these stores are more than 4,000 square feet. They look great. People say they have a target-like feel. Okay. More like a dollar tree type ambiance. They’re also sophisticated lenders. Though some might see them as predators taking advantage of people who have nowhere else to turn to. I am not here to philosophize about the ethical implications of owning a pawnshop stock or payday loan stock. Not debating here merits of shylock other than if you prick even the predator he bleeds. Although in a peculiar lime green color. I am just looking for opportunities in a difficult market and, this is one of them. Besides we need pawnshops. They lend where banks won’t. Serving a vast cohort, of under banked, or, you know, lightly banked consumers who can’t get credit anywhere else. Right now that segment accounts for 30% of US households and astounding 70% of Mexican households which suggests the slowdown is making the US a lot more like Mexico except without the cartels. Persistently high unemployment has created a vast swarm of people who have nowhere else to turn to when they need cash. So they pawn their possessions or take out high interest rate loans against their paychecks either in stores or online.

Pawnshops are one of the few types of business that do really well when the economy stays lousy for a long period of time as it obviously is now. The economics of running a pawnshop are excellent. The more people who come in to pawn their jewelry or hard goods. The more money the pawnbroker stands to make. You probably know how the process works even if you never had to pawn anything. You go to the pawnshop, you give them something like a gold ring as collateral, and they lend you money. Typically 50% to 60% of the actual value of the collateral. Exactly what happened to the grandfather when he needed travel money to find Heidi and, the pawnbroker took him to the cleaners? What a sad scene that was. I think the jets — I think it cut into the jets during that period. Anyway now around 70% of these loans are fully repaid. But, if the loan isn’t repaid that’s almost better for the pawnshop. Because they get to sell the collateral and nonperforming loans. Usually at retail margins of 40% – 45%. It’s a way off to lend money with very little credit well, certainly much less than most of the banks do. Because of the value of that collateral.

Meanwhile the other side of the pawnshop, business, and the retail side is in very good shape. As people trade down and look for deals. General merchandise sales in pawn shops have been strong. And even expensive jewelry sales are starting to up prove. Plus even if they can’t sell the jewelry they can melt it and sell the gold. I am not kidding. And, speaking of gold, since pawn shops own a lot of the stuff, you can think of the group as a back door way to play the precious metal. Again, I’m not kidding. I’ve been thinking about this. These guys– I mean this is what people have. They bought gold much lower they have it in jewelry. These guys profit from it. There’s three large pawn players in the country. First Cash Financial, EZ Corp and Cash America. Of the three I vastly prefer First Cash. FCFS for you home gamers. Because, it has the lowest exposure to pay day loans. Which are under a heavy scrutiny and could face tough new regulations that eat into profits. We don’t know if or when the regulatory shoe will drop but, I’d rather stick with a pawnshop that has least risk of getting hurt by Washington. And, that’s First Cash which gets just 9 to 11% of its revenue from short term liens and credit services in the US. When it comes to lending, any interchange with the government these days — come on man we know it’s got to be avoided. It’s too hard. That’s why I favor this one over Cash America which has had a lot of success rolling out pay day loans over the internet. That’s something that’s gonna put them right in Washington’s cross hair.

Hey, where’s Elizabeth Warren, right? She probably had a real beat on these guys. I think she’s back there teaching at Harvard.

First Cash is best of breed when it comes to the Pawn Space. Cut me 646 stores in the US and Mexico growing like a weed especially south of the border. They’re on track to add an additional 70 to 80 stores this very year. And, most of the new ones are expected to be in Mexico, which has a very large population of under banked or unbanked citizens and relatively few pawnshop chains. In Mexico, which make up 52% of the companies total revenues. First Cash mostly sells hard goods rather than the 50/50 mix of gold and hard goods that they have in the US. And then the latest quarter, the Mexican sales were up an astounding 34%. I have been looking for a Mexico play and, this is it. The rest of the business is in the United States. And, in the most recent First Cash quarter they delivered company wide same store sales growth sales of 17%. That’s an incredible figure for anything including a pawnshop. These guys are doing belter as retailers than most trade up retail outfits. First Cash’s international growth, rapidly increasing store count, and same store sales are through the roof and pairing back exposure to pay day loans. Most recently with the sell of their Illinois Pay Day lending operations, what’s not to like here? You don’t got to shop there to buy the darn stock? Although after I did the home work I vowed to go to the one around the corner from me to see if I can’t get some bargains. That will be this weekend’s business. I had to do meet the press last week or I would have been there like a cheap suit all over it.

First Cash is a little more than a point off its 52-week high. But, I still think it is cheap. 16 times next year’s earnings, 19.5% growth rate. Hardly ever see a P.E., a price to earnings multiple through the growth rate. And, I’m not the only one who thinks this stock is inexpensive, management does too. Which is why they’ve announced they’re going to resume buying back stock under the companies existing repurchase authorization for 1.3 million shares. Here’s the bottom line: pawnshops are on fire right now in this best of times/worst of times economy. My favorite pawn player by far is First Cash Financial. Tremendous web site presentation if you want to see it. I think it is best of breed, with best risk/reward. And the stock is a buy. As the market gets hit off of issues in Washington that are good for the pawnshop business. I’d consider First Cash the Wal-Mart of the game. When Wal-Mart was in its infancy. Before it saturated the country with stores that no one needs to go to anymore. That means that there could be years of good growth ahead. That is bad news for those who have to borrow from pawn shops. But good news for those who own shares in them.