The Equity Observer - Weekly Insights December 9, 2018
CSH
1. November 2, 2015
CASH AMERICA INTERNATIONAL INC.
CSH/NYSE
Continuing Coverage: CSH is as Good as Gold
Investment Rating: Market Underperform
PRICE: $ 34.76 S&P 500: 2,104.05 DJIA: 17,828.76 RUSSELL 2000: 1,186.09
Enova spin‐off reveals true company value
Consumer loan de‐emphasis reduces regulatory risk
New management provides company stability
Continuing acquisitions bring future revenue growth
Mexico divestiture eliminates foreign currency risk
Dividends and stock repurchases return value to shareholders
Our 12‐month target price is $31.00.
Valuation 2014 A 2015 E 2016 E
EPS* $ (0.36) $ 1.03 $ 1.17
P/E NM 33.9x 29.8x
CFPS $ 3.59 $ 4.40 $ 4.43
P/CFPS 9.7x 7.9x 7.8x
* Excluding non‐recurring items
Market Capitalization Stock Data
Equity Market Cap (MM): $ 890 52‐Week Range: $18.77 ‐ $35.32
Enterprise Value (MM): $ 1,076 12‐Month Stock Performance: 61.78%
Shares Outstanding (MM): 25.60 Dividend Yield: 0.86%
Estimated Float (MM): 24.77 Book Value Per Share: $ 40.01
6‐Mo. Avg. Daily Volume: 355,858 Beta: 0.74
Company Quick View:
Cash America is more than just a pawn in the financial services game. Cash
America is the largest pawn shop company in the U.S. The Company operates in
21 states with roughly 900 locations and is headquartered in Fort Worth, Texas.
Cash America offers pawn loans, cash advances, check cashing services, and
other alternative investment options to low‐credit consumers who cannot open
accounts at traditional financial institutions. Cash America also has locations
under the Cashland, Mr. Payroll, and Cash America Payday Advance brands.
Analysts: Investment Research Manager:
Casey Lynch Jacob Pritikin
Marcy Applebaum
Ilyse Bender
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's
Freeman School of Business. The reports are not investment advice and you should not and may not rely on
them in making any investment decision. You should consult an investment professional and/or conduct your
own primary research regarding any potential investment.
Wall Street's Farm Team
BURKENROADREPORTS
3. Cash America International (CSH) BURKENROAD REPORTS (www.burkenroad.org) November 2, 2015
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Table 1: Historical Burkenroad Ratings and Prices
Report Date Stock Price Rating
12 Month
Target Price
11/20/14 $25.00_ Market Outperform $33.00_
11/07/13 $38.64* Market Outperform $50.00*
10/26/12 $38.91* Market Outperform $52.00*
*Price at time of report date and prior to Enova spin‐off
INVESTMENT THESIS
Enova spin‐off reveals true company value
Before November 2014, Cash America had two distinct business segments. The first segment
included retail and pawn lending services, which produced steady, low‐risk revenue streams.
The second segment included e‐commerce services, which produced rapidly growing, high‐risk
revenue streams. The success of each segment depended on different factors. In retail and
pawn lending, profitability depended on economic conditions. In e‐commerce and consumer
lending, profitability depended heavily on regulatory requirements and analytics. The spin‐off
of the Company’s e‐commerce segment, Enova, returned Cash America’s business to a “pure
play” pawn lender. With this spin‐off, the Company reduced its regulatory costs and allowed
management to focus on its core business of pawn lending. In 2014, total pawn loans written
in the U.S. increased by 7.7% compared to a 4.6% increase in 2013, while pawn lending
activities accounted for 90.4% of the Company’s total revenues in 2014. Continued pawn loan
growth should result in increased Company revenues in the future.
Consumer loan de‐emphasis reduces regulatory risk
Cash America is reducing its exposure to regulatory risk by decreasing its consumer lending
services. Pawn lending has a stable regulatory environment, while regulations in consumer
lending are rapidly increasing. In addition to the Enova spin‐off, the Company is de‐
emphasizing its in‐store consumer lending services. Cash America eliminated short‐term
consumer lending services in 311 of its stores in 2014. In addition, the Company eliminated 36
locations in Texas providing only consumer loans. In 2014, consumer loan fees accounted for
only 8.9% of total revenues compared to 11.0% of total revenues in 2013. The Company’s de‐
emphasis on consumer loans will reduce regulatory compliance costs as well as costs
associated with hedging against unknown future regulations.
New management provides company stability
The Company recently restructured its upper management upon the retirement of the former
Chief Executive Officer (CEO), Daniel R. Feehan. T. Brent Stuart took over as Cash America’s
new CEO on November 1, 2015. Mr. Stuart has been with Cash America for five years and the
Company is not expected to change drastically under his leadership. Daniel R. Feehan, Cash
America’s former CEO, will remain active in the Company’s operations with his new position of
Chairman of the Board.
14. Cash America International (CSH) BURKENROAD REPORTS (www.burkenroad.org) November 2, 2015
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Table 2: Peer Analysis
Company
Ticker
Symbol
Stock
Price*
Market
Cap.
(Millions)
P/E P/BV
EV/
EBITDA
EBITDA
Margin
(%)
Debt/E
quity
(%)
Net
Revenue
(Millions)
Cash America
International,
Inc.
CSH
(NYSE)
$27.97 $738 19.3 0.7 8.4 8.6 17.29 $1,100
EZCORP, Inc.
EZPW
(NASDAQ)
$6.17 $327 (6.2) 0.4 4.3 12.6 35.01 $989
First Cash
Financial
Services, Inc.
FCFS
(NASDAQ)
$40.06 $1,115 14.9 2.5 9.1 19.8 56.54 $713
eBay, Inc.
EBAY
(NASDAQ)
$24.44 $29,408 12.6 1.5 5.1 29.2 38.49 $17,900
World
Acceptance
Corp.
WRLD
(NASDAQ)
$26.84 $240 2.2 0.7 3.4 34.9 145.41 $578
Lending Club,
Corp.
LC (NYSE) $13.23 $4,971 (187.6) 4.98 18.8 58.2 367.54 $213
Source: Thompson One
*Price as of Close, September 30, 2015
EZCORP, INC. (EZPW/NASDAQ)
EZCORP, Inc. is a specialty consumer financial services company headquartered in Austin,
Texas. The company offers retail services for previously‐owned merchandise and short‐term
cash solutions including non‐recourse pawn loans, short‐term unsecured loans, and fee‐based
credit services. The company operates 1,358 total locations primarily in the U.S., Mexico, and
Canada. A total of 497 of these locations are U.S. pawn stores. EZCORP’s revenue growth is
steadily declining with 14.3% growth in 2012, 1.61% growth in 2013, and only 0.85% growth in
2014. EZCORP is Cash America’s closest peer based on product and service offerings, but the
two companies differ greatly in size. EZCORP’s market capitalization of $327 million is less than
half of Cash America’s market capitalization of $738 million.
First Cash Financial Services, Inc. (FCFS/NASDAQ)
First Cash Financial Services, Inc. operates 912 retail‐based pawn stores and 93 check cashing
and financial service stores in the U.S. and Mexico. First Cash Financial Services’ primarily
focuses on providing pawn loans with 94.8% of revenues coming from pawn lending activities.
First Cash Financial Services is headquartered in Arlington, Texas but does the majority of its
business in Mexico. Operations in Mexico contribute to 52.5% of total revenues while
operations in the U.S. contribute to 43.9% of total revenues. The company’s revenues have
been steadily growing with 11.6% growth in 2013 and 7.9% growth in 2014. However even
with this steady growth, Cash America generates almost twice the revenue of First Cash
Financial Services.
20. Cash America International (CSH) BURKENROAD REPORTS (www.burkenroad.org) November 2, 2015
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Table 5: Individual Holders
Holder Name Position Shares Held Ownership
Feehan, Daniel R. Executive Chairman 404,585 1.52%
Stuart, T. Brent CEO 56,170 0.21%
Hunter, B. D. Member of Board of Directors 51,881 0.20%
Pepe, Victor L.
Chief Marketing and
Technology Officer
50,441 0.19%
Bessant Jr., Thomas A. CFO 45,265 0.17%
Source: Bloomberg October 4, 2015
Short Position
The short interest ratio provides a significant indicator of market sentiment. After dividing the
short interest by the average daily trading volume, investors can make a decision on the
number of days they want to short a stock if the price of a stock increases. Bearish sentiment
occurs when a short ratio is equal to or greater than five. Cash America has a short ratio of 7.2
days. Therefore, investors are bearish on the Company’s future stock prices.
RISK ANALYSIS AND INVESTMENT CAVEATS
Cash America’s business strategy exposes the Company to regulatory, operational, and
financial risks. Operational risks include reputational risk, the price of gold, unsecured
consumer loan credit risk, and acquisition integration. Financial risks include credit risk and
liquidity risk.
Regulatory Risks
The government heavily enforces regulations in the pawn industry. Federal laws require
truthful advertising and marketing practices, fair financial practices in lending, loan servicing
and debt collection, and protection of sensitive consumer information. At the Federal level,
companies have to observe the Patriot Act, Truth‐in‐Lending Act, Bank Secrecy Act and other
Internal Revenue Service regulations. If shops handle firearms, they must also follow the
Brady Handgun Violence Prevention Act. Inability to abide to regulations causes a store to lose
its license.
At the state level, pawn establishments must obtain licenses. Failure to adhere to state laws
can cause a company to lose its license. States regulate pawn shops’ service charges, interest
rates, minimum and maximum terms of a pawn loan, the content and format of the pawn
ticket, and the length of time after a loan default that a pawn lending location must hold a
pawned item before disposing of it.
22. Cash America International (CSH) BURKENROAD REPORTS (www.burkenroad.org) November 2, 2015
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As shown in Table 6, the debt‐to‐equity ratio, debt to earnings before interest taxes
depreciation and amortization ratio, and interest coverage ratio is below the peer average.
From 2014 to 2013, the Company’s interest coverage ratio decreased by 2.9% to its current
ratio of 2.1% suggesting it may be able to pay interest expenses on its outstanding debt.
Table 6: Leverage Ratios
Company
Debt/Equity
Ratio
Debt/EBITDA
Ratio
Interest Coverage
Ratio
Cash America 17.29% 2.0% 2.1%
EZCORP 35.01% 2.5% 2.9%
First Cash Financial Services 56.54% 1.8% 7.6%
World Acceptance Corp. 145.41% 2.3% 8.7%
eBay 38.49% 1.5% 12.8%
Lending Club 367.54% 8.5% 0.9%
Peer Average 110.05% 3.1% 5.8%
Source: Thomson One October 6, 2015
Liquidity Risk
Liquidity allows a company to quickly sell its assets and securities to fulfill its short‐term
financial demands. The Company uses the current ratio to assess its liquidity by computing the
ratio of current assets to current liabilities. Cash America has a current ratio of 6.5, which is a
12% increase from 2013. The Company also uses its quick ratio of 4.8 to assess liquidity. The
quick ratio describes the current assets available, excluding inventory, to cover current
liabilities. Cash America’s high current and quick ratios show its assets are capable of covering
its liabilities.
FINANCIAL PERFORMANCE AND PROJECTIONS
To project Cash America’s future financial performance, we made assumptions regarding the
Company’s operating, investing, and financing activities. Our assumptions used information
provided in Cash America’s SEC filings, quarterly conference calls, and other data sources,
along with management guidance.
Operating Activities
To forecast revenues, we used a regression model combined with a terminal growth rate
based off of assumptions from the Company’s SEC filings. Our model used six key independent
variables and revenues as the dependent variable. Independent variables included seasonality
in the second and fourth quarters, gold prices, gas prices, unemployment, and property, plant,
and equipment. The Company’s operations are subject to seasonal fluctuations from tax
refunds in the first quarter and holiday spending in the fourth quarter. Gold prices greatly
impact revenues because 62.9% of collateral held is gold jewelry.
27. Cash America International (CSH) BURKENROAD REPORTS (www.burkenroad.org) November 2, 2015
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ANOTHER WAY TO LOOK AT IT
ALTMAN Z‐SCORE
Edward Altman originally created the Altman Z‐score in 1968 to evaluate the bankruptcy risk
for companies over the next two years. Altman calculated the Z‐Score by adding five different
financial ratios and assigning weights to adjust for additional financial risk. Within the four
different zones, a company is safe when bankruptcy risk is low and the Z‐Score is greater than
three. When the Z‐Score is between 2.7 and 2.99, a company should be cautious of
bankruptcy, but risk is minor. A Z‐Score between 1.8 and 2.7 implies moderate bankruptcy
risk. When the Z‐Score is less than 1.8, the company is headed toward a financial catastrophe
Table 7 shows Cash America’s historical Z‐Scores over the last five years. In 2014, Cash
America recovered from its financial distress of 2013. Cash America’s most recent Z‐score is
in the safe zone due to the Company’s restructuring after the Enova spin‐off.
Table 7: Cash America’s Historical Z‐Scores
Year 2010 2011 2012 2013 2014
Z‐Scores 3.51 3.61 2.34 1.71 3.23
Source: Cash America 10K filings
29. Cash America International (CSH) BURKENROAD REPORTS (www.burkenroad.org) November 2, 2015
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WWBD?
What Would Ben (Graham) Do?
Ben Graham is very influential to investors due to his value investing, which focuses on
undervalued stocks and eight identifying criteria. The first six criteria decide if a company is
underpriced. The last two criteria examine a company’s growth consistency and potential. A
company is attractive, according to Graham, if it meets four or more of the criteria.
As of November 2, 2015, Graham would label Cash America as relatively attractive because
the Company meets four of the eight criteria. Cash America meets the hurdles of having an
earnings to price yield two times the yield on a ten‐year treasury note, a stock prices less
than 1.5 times the book value per share of the Company, an amount of total debt less than
book value, and a current ratio of two or greater. The Company fails the remaining hurdles of
a price to earnings ratio (P/E) ratio of half of the stocks highest P/E ratio in the past five
previous years, a dividend yield that is half the yield of a ten‐year treasury note, an earnings
growth of 7% or higher over the past five years, and a stability in growth of earnings.
However, because Cash America only meets half of the criteria, Ben would not have
complete confidence in investing in the Company. Cash America does not meet either of Ben
Graham’s tests for growth consistency and potential.
Figure 9: Ben Graham Dial
30. Cash America International (CSH) BURKENROAD REPORTS (www.burkenroad.org) November 2, 2015
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Earnings per share (ttm) 1.77$ Price: 34.76$
Earnings to Price Yield 5.10%
10 Year Treasury (2X) 4.32%
P/E ratio as of 12/30/10 4.5
P/E ratio as of 12/30/11 4.9
P/E ratio as of 12/30/12 5.0
P/E ratio as of 12/30/13 5.8
P/E ratio as of 12/30/14 (10.2)
Current P/E Ratio 19.6
Dividends per share (ttm) 0.15$ Price: 34.76$
Dividend Yield 0.43%
1/2 Yield on 10 Year Treasury 1.08%
Stock Price 34.76$
Book Value per share as of 9/30/15 38.59$
150% of book Value per share as of 9/30/15 57.89$
Interest‐bearing debt as of 9/30/15 206,239$
Book value as of 9/30/15 1,024,169$
Current assets as of 9/30/15 687,305$
Current liabilities as of 9/30/15 99,250$
Current ratio as of 9/30/15 6.9
EPS for year ended 12/30/14 (2.22)$
EPS for year ended 12/30/13 2.96$
EPS for year ended 12/30/12 3.42$
EPS for year ended 12/30/11 4.25$
EPS for year ended 12/30/10 3.67$
EPS for year ended 12/30/14 (2.22)$ ‐175%
EPS for year ended 12/30/13 2.96$ ‐13%
EPS for year ended 12/30/12 3.42$ ‐20%
EPS for year ended 12/30/11 4.25$ 16%
EPS for year ended 12/30/10 3.67$
Stock price data as of November 2, 2015
No
CASH AMERICA INTERNATIONAL INC. (CSH)
Ben Graham Analysis
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
Yes
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
No
Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury
No
Hurdle # 4: A Stock Price less than 1.5 BV
Yes
Hurdle # 5: Total Debt less than Book Value
Yes
Hurdle # 6: Current Ratio of Two or More
Yes
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
No
Hurdle # 8: Stability in Growth of Earnings