FirstCash Executing Well And Still Undervalued

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When times get tougher, FirstCash (NASDAQ:FCFS) often gets going, arsenic FirstCash's halfway customer guidelines often finds their entree to in installments much constricted erstwhile nan rhythm has turned over. And fixed nan number of banks expanding their provisions and openly talking astir reducing consequence successful their indebtedness operations, that's wherever we're astatine today.

While request and nonaccomplishment trends are good worthy watching successful nan America First Financial lease-to-own business, peculiarly fixed management's deficiency of familiarity pinch nan business done a afloat cycle, I don't spot immoderate peculiarly concerning operational trends. Moreover, while AFF is surely large capable to wound difficult if FirstCash makes mistakes pinch nan business, nan pawn operations will proceed to make nan ample mostly of nan company's net and nan maturation outlook remains attractive.

FirstCash shares person risen much than 20% since my last update, and that's beautiful beardown compared to different pawn lenders, lease-to-own operators, and user finance companies for illustration SoFi (SOFI) and Dave (DAVE). Truthfully, this is simply a difficult institution to benchmark, but while I expect to spot immoderate macro headwinds successful nan business adjacent year, I'm still comfortable pinch a mid-to-high single-digit maturation outlook that supports a adjacent worth adjacent to $100.

A Bit Soft On Revenue, But With Healthy Margins

I'll authorities upfront that FirstCash's net reports are not really for nan novice investor, arsenic there's a batch to benignant done betwixt GAAP and adjusted earnings. In immoderate case, halfway results were a spot ray connected nan topline (due to weaker measurement successful nan lease-to-own business), but wide margins were a spot amended than expected.

Revenue roseate 49% twelvemonth complete twelvemonth and 11% 4th complete 4th arsenic reported, aliases 50% yoy and 11% connected an adjusted ground (the accommodation coming from acquisition accounting curen for nan leasing business). Overall unit gross roseate astir 10% yoy arsenic reported (up 19% qoq, boosted by nan vacation season), pinch pawn fees up 16% yoy and 3% qoq and lease-to-own gross up 3% sequentially.

Revenue from U.S. pawn operations roseate 12%, pinch halfway pawn gross up 8% connected 4% same-store unit income maturation and 16% same-store pawn interest revenue. Latin American pawn cognition gross accrued 20% arsenic reported aliases 15% successful changeless currency, pinch a 14% same-store changeless rate betterment successful unit gross and a 10% same-store changeless rate betterment successful pawn indebtedness fees.

Pre-tax net roseate 15% yoy and 18% qoq successful nan U.S. pawn operations (with separator up 50bp to 24.5%), while nan LatAm operations improved 14% yoy successful changeless currency, and 17% qoq successful reported terms, pinch separator down 20bp to 21.5%. The AFF business saw an 11% sequential betterment successful profits, pinch separator up 110bp to 14.2%.

Retail margins were coagulated successful nan U.S. business, down 1 constituent yoy and up 1 constituent qoq to 42%, while down 2 points yoy and qoq to 34%, but still mostly successful statement pinch humanities trends. Likewise, I spot thing that concerns maine overmuch successful nan inventory move aliases pawn collateral numbers, though I'm a spot concerned astir FirstCash continuing to find attractively-priced merchandise to support nan U.S. unit operations cruising along.

AFF transaction measurement was up 5%, pinch a 1% diminution successful origination volume, while user balances were up 2% connected a 15% summation successful lease-to-own merchandise and a 25% adjusted diminution successful finance receivables. Overall charge-offs looked unchangeable astatine 13.3% for nan 4th (versus 13.6% successful nan anterior quarter).

Healthy Consumer Finance Demand, But Mixed Trends In Lease-To-Own

Guidance for 2023 was mostly positive, pinch mid-single-digit halfway pawn indebtedness maturation against much challenging comps arsenic 2023 develops. Pawn receivables were patient connected a year-over-year ground (up 8% same-store successful nan U.S. and 12% same-store changeless rate successful LatAm) but decidedly slowed connected a sequential ground (up 1% successful nan U.S., down 13% successful LatAm).

It's not different to spot immoderate deceleration successful nan 4th quarter, and I judge FirstCash has immoderate important operating advantages going into 2023. Funding costs are shooting up, and galore competing unsecured lenders are facing important increases successful their borrowing costs. I expect galore of these lenders, peculiarly app-based fintech lenders, will move to higher minimum fees and different charges to offset nan backing costs pressure, and that could good extremity up alienating their customer guidelines erstwhile they tally nan numbers connected nan full costs they're paying and comparison them to alternatives for illustration FirstCash. By comparison, FirstCash has nan advantage of well-established operations and established financing that gives them entree to advantageously-priced capital.

The biggest consequence to FirstCash's halfway pawn operations successful 2023 whitethorn good beryllium that nan system doesn't really slow. Employment and wages are still rather strong, and borrowers whitethorn not find themselves successful nan position of coming up a small short of hours erstwhile they request to salary a aesculapian measure aliases salary for a vacation. By nan aforesaid token, though, expenses for illustration aesculapian bills aliases car repairs travel nary matter wherever we are successful nan economical cycle, and FirstCash has an established halfway customer guidelines that is accustomed to nan institution erstwhile temporarily short of costs (75% of nan company's pawn loans are yet redeemed).

I'm little assured connected nan lease-to-own business going into 2023, peculiarly pinch guidance guiding that astir of nan topline maturation will travel from expanding nan number of stores offering their services. It's not that astonishing that customer request for bigger-ticket items for illustration furnishings would beryllium weaker, but I do still person my doubts astir full-cycle user request for lease-to-own astatine a clip erstwhile "buy now, salary later" financing alternatives are increasing truthful rapidly.

As acold arsenic in installments value issues go, I'm not excessively concerned. The repossession process is beautiful straightforward if lessees miss payments (and don't make arrangements pinch nan lessor), truthful it's not arsenic though months of unpaid lease payments are going to accumulate. There is simply a consequence that FirstCash won't recoup afloat worth connected repossessed assets, but it's not arsenic if guidance isn't knowledgeable astatine maximizing nan worth of surrendered merchandise, nor pricing their financing pinch an oculus toward nonaccomplishment mitigation if nan transaction goes south.

Said differently, while lease-to-own is still caller to FirstCash, lending to this customer guidelines is not new, and FirstCash understands nan basal concepts of estimating apt in installments outcomes and pricing accordingly.

The Outlook

For nan pawn businesses, not a batch has really changed. I proceed to expect nan U.S. operations to beryllium a slower-growing, high-margin business that generates charismatic rate flow. I besides expect FirstCash to proceed benefitting from its position arsenic a preferred acquirer, pinch owner-operators of smaller pawn chains utilizing FirstCash arsenic a cash-out action to money their retirements.

For nan LatAm operations, location are still maturation opportunities successful Mexico (including different formats/store sizes), arsenic good arsenic successful galore different countries, and I expect guidance to proceed pinch a cautious and deliberate integrated shop maturation approach, supplemented by opportunistic M&A. Management has besides said that they're looking to yet grow nan lease-to-own conception into Latin America.

I see nan lease-to-own business a "we'll see" proposition. I've been little bullish connected this business since FirstCash acquired it, and while I spot opportunities for this business to make profitable growth, I've besides seen a surge successful point-of-sale financing alternatives. I whitethorn beryllium excessively pessimistic connected this business, but I would statement that FirstCash has written down nan contingent costs obligations for nan acquisition, meaning it hasn't lived up to nan level contemplated erstwhile they did nan deal.

I've bumped up my 2023 estimates, mostly connected nan momentum FirstCash carries into 2023 from a stronger 2nd half of 2022 than I'd expected. I do deliberation AFF could beryllium a small much margin/cash travel dilutive successful FY'23 and FY'24, but I'm still expecting high-single-digit semipermanent gross maturation (7% to 8%) and low-double-digit adjusted FCF margins that should thrust high-single-digit FCF growth. Higher charge-offs successful AFF and a faster gait of integrated maturation successful LatAm (leading to higher capex spending) are nan 2 biggest risks I spot connected nan FCF separator broadside of nan ledger.

The Bottom Line

Discounting those rate flows back, I get a adjacent worth of astir $100 today, and I deliberation that's still capable upside to make these shares worthwhile, peculiarly fixed that location could still beryllium an operational upside to some nan pawn and lease-to-own operations comparative to my expectations. I will note, though, that this institution has had a batch of cyclicality/volatility successful its net and stock value complete past cycles, truthful this isn't a sanction for investors who can't tummy immoderate sizable swings on nan way.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.