FirstCash Stock Has A 40% Upside Driven By Recovery In Consumer Spending
We believe that FirstCash’s stock (NASDAQ: FCFS) has an upside potential of 40% in the next 1-1.5 years, once consumer spending recovers to the pre-Covid-19 levels. FirstCash, an international operator of over 2,700 retail pawn stores in the U.S. and Latin America, trades at $60 currently and has gained 15% in value so far this year. It traded at a pre-Covid high of $85 in February 2020 and is 30% below that level now. Also, FCFS stock has further lost 6% from the low of $63 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is lagging the broader markets by a huge margin (S&P 500 is up about 70% since March lows), as investors are concerned about recovery in the origination of new pawn loans and lower inventory levels of retail merchandise, due to the drop in consumer spending.
Although FirstCash has reported better than expected EPS over the last four quarters, its revenues tell a different story. Its cumulative nine months revenues fell by 9% y-o-y to $1.2 billion, primarily driven by an 18% drop in pawn loan fees. Further, FCFS’s inventory balance saw a significant decrease due to a decline in inventory generated from forfeited pawn loans and higher second-quarter retail sales – the U.S. inventory balance at the end of September 2020 was 35% lower on a year-on-year basis. The pawn loan origination demand has struggled in 2020 due to lower consumer spending, lock-down restrictions, and government stimulus programs. However, as the Covid-19 crisis subsides and the economy moves towards normalcy, we expect consumer spending to recover, leading to growth in new pawn loans and inventory balances. Further, the company has a strong retail presence across locations and is a market leader in its segment, which is likely to strengthen its growth prospects. In view of the meager growth in FirstCash stock since late March 2020, we believe that the stock has strong growth potential in the next 1-1.5 years (back to its pre-Covid peak). Our conclusion is based on our detailed analysis of FirstCash’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 69% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how FCFS and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of the S&P 500 index
- 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)
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FirstCash vs S&P 500 Performance Over 2007-08 Financial Crisis
FirstCash stock declined from levels of around $24 in October 2007 (the pre-crisis peak) to roughly $14 in March 2009 (as the markets bottomed out), implying that the stock lost around 44% of its value from its approximate pre-crisis peak. This marked less of a drop than the broader S&P, which fell by about 51%.
However, FCFS recovered strongly post the 2008 crisis to about $22 in early 2010 – rising by 62% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
FirstCash’s Fundamentals in Recent Years Look Strong
FirstCash revenues grew by 73% from $1.1 billion in 2016 to $1.9 billion in 2019, primarily led by the growth in retail merchandise sales and pawn loans. The company saw a significant increase in revenues in 2017 due to the merger of Cash America in September 2016. Similarly, the company’s net income improved from $60.1 million to $164.6 million over the same period. The company’s Q3 2020 revenues were 20% below the year-ago period and its EPS figure decreased from $0.81 to $0.36.
Does FirstCash Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
FirstCash’s total debt increased from around $460 million in 2016 to close to $532.8 million at the end of Q3 2020, while its total cash decreased from $90 million to $78.8 million over the same period. The company also generated $177.4 million in cash from its operations in the first nine months of 2020, and it appears to be in a satisfactory position to weather the crisis.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $85 (40% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $85 level FCFS stock was at before the coronavirus outbreak gained global momentum.
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