Are Payday Lender Shares Due for a Rebound?

US Banker | August, 2010

A stock surge last week by payday lender Dollar Financial was a rare bright spot for an industry that had fallen out of favor with Wall Street.

On Friday, shares of Dollar shot up 27 percent, to $19.78 a share, after the Berwyn, Pa., firm reported earnings that beat analysts’ quarterly and annual estimates. Dollar had been among several publicly traded payday lenders whose stock price had plunged in recent months as investors panicked over proposed federal and state regulations to curtail or restrict high-interest lending practices.

The stock boost fueled speculation that profit opportunities for Dollar and its competitors could soon start improving—even with more states impose restrictions on payday lenders and the industry expected to come under increasing scrutiny from a forthcoming Consumer Financial Protection Bureau.

An investor newsletter, the Wall Street Cheat Sheet, said that with options for credit-challenged and unbanked/underbanked consumers, “an underclass is developing in America. When those afflicted can no longer participate in the conventional economy, companies like [Dollar] will be the ones laying in wait, offering them near-usurious short-term financing.”

StreetAuthority.com analyst David Sternam said another payday lender, Advance Cash America, could see earnings per share increase by 24 percent in 2011. “As more low-income consumers find it difficult to obtain new credit cards, demand – and profits – may keep rising into 2012,” Sternam wrote in a recent report.

Other factors certainly play into each lender’s outlook—Dollar has a booming international payday lending business, and Advance Cash is cutting overhead by closing 92 stores this year—but Stephens Inc. consumer finance analyst David Burtzlaff agrees that the performance is improving for certain lenders whose stocks are trading at “multiples” below their expected EPS value. “Advance is seeing growth in states that have not had regulatory changes,” says Burtzlaff. “When you factor in the regulatory changes, the growth is down. But outside of that, their business would be up mid-single digits.”

Where much of the growth may happen, say analysts, is from the lenders’ expansion into alternative products, to lessen their dependence on payday revenues. Advance America, for example, is growing its prepaid card offerings and bill-pay services at its stores. Burtzlaff adds that all of these major payday lenders are eager to add high-profit pawn stores to their portfolios as well. Cash America announced an acquisition this month of a chain of 39 pawn shops in Washington and Arizona, continuing a two-year buying spree that has increased its number of pawn shops to 244. “All of these guys would like to add U.S. pawn assets,” says Burtzlaff.

The biggest concern for payday lenders and investors at this point is how the new consumer protection bureau might treat payday loans and other consumer financial products. Another potential threat to future profits is a program established by the Dodd-Frank legislation that would provide incentives to banks and community development institutions that make low-cost, small-dollar consumer loans. Andrea Kovach, a staff attorney with the Shriver Center, an anti-poverty organization in Washington, D.C., wrote in a recent blog post have small-dollar loans originated by banks have the potential to “significantly increase the number of affordable small-dollar loans available to consumers.”