Sunday, March 1, 2009

Payday Lenders Getting Obama'd

Thanks to reader Link for sending this story via AP - much as I imagined this massive weakness had something to do with politics. We had the same issue near the turn of the year [Jan 7, 2009: Pawn Shops - Something is Up]

Shares of payday lending companies EZCorp Inc., Cash America International Inc. and First Cash Financial Services Inc. slid Wednesday amid growing expectations that President-elect Barack Obama will tighten regulations on the industry. The statement also says Obama plans "to extend a 36 percent interest cap to all Americans" and "require lenders to provide clear and simplified information about loan fees, payments and penalties."

Unfortunately, despite a company executing over and over [Jan 23, 2009: EZCORP Up 17% on Earnings] [Nov 6, 2008: EZCORP - Executing Well, Raising Guidance for '09] the pattern seems to be surge on earnings and sell off the other 2.9 months of the quarter as hand wringing about legislation dominates. It is too bad we cannot separate the cash advance business (which we don't like) from the pawn business (which we do like) Ironically we chose EZCORP (EZPW) since it had less of a reliance on cash advance than some competitors but it has not shielded it one bit. Same with First Cash Financial (FCFS) who has a similar ratio of cash advance to pawn shop

  • Shares of several payday lenders and pawn shop owners continued to fall for a second day Friday amid signs of tighter short-term consumer loan regulation at the federal and state levels.
  • Sterne Agee analyst Henry Coffey said in a research note Friday that a bill expected to be introduced soon in the U.S. House of Representatives would focus on payday lenders, and likely will include a 36 percent cap on interest rates. A broader financial services bill being prepared in the Senate also is expected to include a 36 percent cap, Coffey said.
  • "Any bill coming out of Congress is likely to ban or crimp the payday loan product," Coffey wrote.
  • Coffey said he considers concerns that Mexico could impose a rate cap on its growing consumer finance industry to be "overblown." But he wrote that the possibility is a "risk factor." He noted that FirstCash Financial Services Inc. has the greatest exposure to the Mexican consumer finance market in a group of companies that also includes Cash America International Inc., Dollar Financial Corp., EZCORP Inc. and World Acceptance Corp.
  • Lawmakers in several states also are considering tightening laws governing payday loans, which are short-term, unsecured loans offered to cash-strapped consumers. The loans typically mature in two weeks or on the borrower's next payday. They are often priced at a fixed-dollar fee, but the underlying annual interest rate is usually near 400 percent or more. The possibility of a 36 percent cap would effectively ban current industry practices.
As I said in January

I'd like to add that with the default rate of many people who visit payday lenders, there will be no business at 36%. I've investigated this business very in depth in a "real world" (non investing) angle - the default rates are immense. While 400% is egregious, 36% is not a rate that will be profitable considering default rates many times in the 30-70%+ range. These are people with FICOs in the 450-550 range much of the time i.e. they don't pay you back for long.

So effectively this cash advance market will come to a close and people who are already desperate for money will be turning to... well I don't know. Maybe the federal government who is doing a great job of handing money from one group to another. Frankly some credit card companies are putting people with much higher FICO scores into 28% interest rates, so you are going to put the lowest FICO scores into 36%? The model dies.

As to EZCORP for such a broken stock - the only play now is to buy on the dip, sell (and then short) into the rip back up into resistence so that will be our game plan for now. The sector now has overhang of (at best) potential legislation and (at worst) actual legislation.

Obama does not heart payday lenders. He did the same to "safe" sectors like health care/insurers - one example of destruction below. Remember when Obama used to push stocks up (infrastructure) Those were the days... (60 days ago)

Long EZCORP in fund; no personal position

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