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  • garp_trader garp_trader Aug 28, 2006 11:19 PM Flag

    Roth Capital analyst comments

    Take a look at the number of proposals which have been made the last few years in the various state legislatures. Note also that while the TX CSO allows lending at $20/$100, many other states limit payday rates to $15/$100 lent.

    http://www.ncsl.org/programs/banking/PaydayLending_2006Pending.htm

    http://www.ncsl.org/programs/banking/PaydayLending_2005Pending.htm

    http://www.ncsl.org/programs/banking/PaydayLending_2004Pending.htm

    Now let's pretend your store has 20 two-week loans outstanding at a time for $100 each. You are lending $2000 every two weeks at $20/$100 for $400 in revenue or $800/month. We'll assume 19 of the loans are paid back and that one defaults for loan losses of $200/month. Assume no late fees/bad check charges. The cost of salaries, rent, advertising and other store operating expenses comes to $400 a month (AEA 10K p.48 shows store opex about 2/3 of net revenues after loan losses which are about $140k/yr). Your monthly profit is as follows:

    Revenue 20 loans x $20/$100 x 2/month = $800
    losses 1/20 x 40 loans/month x $100 = (200)
    lost revenue on defaulted loans 2 x $20 (40)
    Net revenue after loan losses $560
    Store opex (~2/3 net rev per AEA 10K) (375)
    Monthly store profit $185

    Now imagine the state legislature reduces the rate to $15/$100. What is the impact? Your store operating expenses will be the same. The 5% loss ratio will not magically improve. The lost revenue comes straight out of your pocket...

    Impact 19 good loans x $5/$100 x 2/month = $190

    So the legislative reduction of 25% instantly wipes out your store profits. Time to pursue other opportunities :) One nice thing about CSH's expansion to online lending is that ecommerce entails lower costs per transaction. An online presence can serve the entire nation versus one store only being able to serve a small community. Due to lower operating expenses a legislative initiative doesn't necessarily put you out of business. So while CSH is growing slower than EZPW, I still like CSH as a long-term holding. Perhaps at some point the other payday players will follow CSH's online lead. I like CSH's move better than FCFS'.

    I am not aware of any proposed legislation in TX though often state proposals include limiting the frequency of loans or number of rollovers. As in many businesses, the largest portion of volume comes from repeat customers...

    http://www.responsiblelending.org/pdfs/CRLpaydaylendingstudy121803.pdf

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    • Note that in the preceding example I was trying to use round numbers so came up with a $400 opex figure. I then realized that one would have to back out the revenue on the bad loans so then altered the opex figure to $375. I forgot to change the $400 figure in the commentary. Sorry for any confusion. Hopefully the point is still clear that the percentage impact of a reduction in rates either due to legislation or competition is leveraged due to the high-margin nature of this business and operating expenses.

    • "So while CSH is growing slower than EZPW, I still like CSH as a long-term holding. Perhaps at some point the other payday players will follow CSH's online lead. I like CSH's move better than FCFS'."

      Don't forget AEA as well. AEA is huge, no one else even comes close.

      EZPW junky likes to rant about EZPW's 300 maturing stores. But AEA opens that many new stores *per year*. AEA is pretty much everywhere where PDL's are legal, and even a few places where they arent [PA :-) ]

      AEA is also much more commited to shareholder value with an active share repurchase program and a serious dividend.

      While AEA seems to be a bit stodgy, they are going to roll out a money transfer service and start offering prepaid debit cards.

      They also have good capital acess, including a $265 million revolver with only $25M drawn on it. AEA can pull the trigger on $230 Million if needed.

 
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