Over the past few weeks, we have received a number of subscriber emails relating to the pawn lenders.  Although the questions and correspondence dealt with a wide variety of topics, they indicated that investors want to know more about how this industry operates and generates profits.  Value Line tracks three publicly traded companies in this space and elevated investor interest appears logical since these companies achieved record share earnings during the recent recession.  The corresponding stocks also performed well, reaching lofty heights.  It appears that during hard economic times, portfolios may be well served having some participation in this industry.

Cash America International (CSH) is the largest pawn lender (by market capitalization) under Value Line coverage.  It operates more than 500 pawn stores in 22 U.S. states and about 200 in Mexico.  EZCORP (EZPW) is another major player, and operates approximately 375 stores in the U.S., 65 in Mexico and two in Canada.  Lastly, First Cash Financial Services (FCFS) has over 550 locations in the U.S. and Mexico.

A pawn loan is a relatively simple financial transaction.  An individual borrows money (typically for a term of 30 to 180 days), the amount of which is based on specific collateral (most commonly jewelry, electronics, or musical instruments).  At the end of the term, the individual pays back the loan (plus interest), or the pawn lender keeps the collateral.  Cash America and EZCORP also offer payday loan services, which enables customers to receive cash immediately in exchange for their next paycheck (minus a fee).

Due to the subprime meltdown, housing market downturn, and other factors, most banks and traditional financial institutions tightened their credit standards.  The elevated unemployment rate caused more and more individuals to need cash inflows to cover short-term expenses, and the banks commonly turned away these elevated-default-risk customers.  Thus, these lenders, which do not perform credit checks on pawn loans, realized strong demand for their services.  For instance, in its most recent fiscal year (ended September 30, 2009), EZCORP posted a 34% increase in pawn loans.  Cash America and First Cash also achieved healthy results during the recession.  In following, unlike the majority of public companies tracked within the Value Line Investment Survey, the pawn lenders’ share earnings increased, year over year, in 2008, as well as in 2009.

These companies’ bottom lines also benefited from successful expansion efforts.  Over the past few years, they have aggressively stretched out into Mexico and Canada, and continue to bolster their footprints in these countries.  Cash America has opened about 75 stores in Mexico in the past year, and dozens of ribbon cuttings appear likely in the months ahead.  Currently, it is also exploring opportunities in the United Kingdom and Australia.  These new operations should support solid earnings gains in the years ahead.

As for the stocks, all three rebounded quickly after the March, 2008 market lows and reached lofty prices over the past year or so.  During that time, a good number of investors scrambled to find financially sound companies with good and consistent earnings prospects that could weather the market and economic downturn.  The pawn lenders turned out to be good choices, since all three companies possess good grades for Financial Strength, posted healthy profits gains, and the equities hold above-average scores for Earnings Predictability.

Looking ahead, although a U.S. economic rebound appears under way, the unemployment rate continues to hover around 10%.  Thus, in our view, Cash America, EZCORP, and First Cash will continue to post healthy top- and bottom-line gains.  In addition, during future tough and uncertain economic periods, investors may be well served adding one or more of these defensive-minded stocks to their portfolios.