Payday Loan and Check Cashing Stocks: Can Usury Be Profitable For Investors? QCCO, DLLR, CSFS

In a rough economy, payday loans and check cashing stocks like QC Holdings (NASDAQ: QCCO), DFC Global Corp (NASDAQ: DLLR) and The Cash Store Financial Services (NYSE: CSFS) are booming (check out my article: “In a Pawn Shop Economy, Are Pawn Shop Stocks Good For Investors? EZPW, FCFS, CSH”). In fact and according to the Predatory Lending Association or PLA (Now, something tells me that having a name like that means the PLA is actually a spoof website AGAINST the payday loan industry…..), there are more than 22,000 payday loan locations across the US who extend $40 billion in loans to millions of working poor households while 90% of industry profits are generated by repeat borrowers who roll over their loans. Moreover, the Predatory Lending Association (PLA) also claims that in some states, there are more predatory payday lenders than Starbucks™ coffee shops (a statistic I would tend to believe…) but a report cited by the PLA also claims that: "Nearly nine out of ten households surveyed think that payday lending is a bad thing." Morality and the threat of a government crackdown aside, could payday loan and check cashing stock like QC Holdings (QCCO), DFC Global Corp (DLLR) and The Cash Store Financial Services (CSFS) be good for investors? Here is a closer look at all three stocks to help you decide whether usury is a good business:

QC Holdings (NASDAQ: QCCO)

QC Holdings provides short-term consumer loans from over 500 locations in the US. QC Holdings recently reported financial results are a good case study about the opportunities and challenges faced by payday loan, check cashing and other providers of short-term consumer loans. Specifically, QC Holdings reported revenues of $48.3 million and income from continuing operations of $2.1 million. QC Holdings’ Chairman and CEO noted that revenue was driven by increases in their installment and title lending products but these increases were also offset by a higher loss ratio due to the transition to new products thanks to recent changes in lending laws in several states where the company operates. QC Holdings’ loan losses had totaled $12.4 million versus $10.7 million for 3Q2010 with the loss ratio rising to 25.7% versus 22.6% for the same period last year thanks to higher losses in Illinois, Wisconsin and South Carolina where laws were recently changed. QC Holdings also noted an increase in automotive revenues despite higher vehicle acquisition prices. In other words, providers of short-term loans like QC Holdings can also face the same threats that banks and retailers face in a slow or weak economy. On Wednesday, QC Holdings fell 0.55% to $3.59 (QCCO has a 52 week trading range of $2.50 to $5.26 a share) for a market cap of $61 million.

DFC Global Corp (NASDAQ: DLLR)

DFC Global Corp provides financials services to unbanked and under-banked consumers through retail storefront locations and other means in several countries, including Canada, Finland, Ireland, Poland, the United Kingdom and the US. For 3Q2011, DFC Global Corp reported that consolidated total revenue for fiscal 1Q2012 surged 50.2% (43.9% on a constant currency basis) to a record $261.6 million. More specifically, DFC Global Corp reported that total consumer lending revenue surged 70.7% to $157.0 million compared to the prior year period while revenue from internet-based loans surged to $59.2 million from $11.6 million and total revenue from pawn lending increased to $20.8 million from $6.3 million. And while DFC Global Corp has operations in several countries (In July 2011, the company acquired Risicum which provides internet loans in Finland), its revenues were generally not seriously impacted by currency fluctuations in the latest quarterly results. Moreover, DFC Global Corp’s Chairman and CEO noted that secured pawn lending is now the company's second fastest growing product and the company is seeking to consolidate the pawn shop industry in specific European countries. Hence, DFC Global Corp is positioned to become the largest pawn loan provider in Europe by loan book size and the third largest provider worldwide. DFC Global Corp rose 5.4% to $18.15 (DLLR has a 52 week trading range of $15.80 to $24.89 a share) for a market cap of over $796 million.

The Cash Store Financial Services (NYSE: CSFS)

The Cash Store Financial Services is the broker of short-term advances and operated around 574 short-term advance branches across Canada and 17 branches in the United Kingdom. Perhaps a sign of the strength of the Canadian economy verses that of the US, The Cash Store Financial Services reported that revenue for the fiscal year ended September 30, 2011 rose only 6.1% to $189.9 million but other revenue rose 26.2% to $53.3 million. However, branch operating income fell 10.7% to $55.0 million while same branch revenues for the 445 locations open since the beginning of October 2009 fell by 5.1% to $356,250 from $375,400. It was noted by the Chairman and CEO of The Cash Store Financial Services that the company’s decrease in net income was due to a variety of reasons, including investments in expanding the company’s infrastructure in the United Kingdom (UK), investments in collections infrastructure, new product development and regulatory administrative costs. However and ironically, The Cash Store Financial Services might have had much better results if it were operating in the US as a bad economy is obviously good for anyone in the payday loan and check cashing business. On Wednesday, The Cash Store Financial Services fell 7.78% to $6.40 (CSFS has a 52 week trading range of $6.35 to $17.41 a share) for a market cap of just under $121 million.

The Bottom Line. In a rough economy, usury can be a good business but investors should still be aware that payday loans and check cashing stocks like QC Holdings (QCCO), DFC Global Corp (DLLR) and The Cash Store Financial Services (CSFS) may also face a government crackdown or worst: The economy could actually improve for those at the bottom.