FirstCash Looks Attractive At $63

FCFS: FirstCash Holdings logo
FCFS
FirstCash Holdings

Although FirstCash stock (NASDAQ: FCFS) is at the same level as during the March 23 lows of the year, at the current price of around $63 per share we believe it has more to go based on its historic P/E Multiple. FirstCash, a leading international operator of over 2,700 retail pawn stores in the U.S. and Latin America, has seen its stock drop from $80 at the end of 2019 to $63 at the March low, and is currently at the same level. (In comparison the S&P 500 gained 50% since the March 23 lows.) It is lagging the market as investors are overly cautious about the drop in the origination of pawn loans and closure of its unsecured consumer lending business. Further, the stock is down 12% from levels seen at the end of 2018.

FirstCash’s stock is 27% below the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. We feel that the company’s stock still has potential as its valuation implies it has further to go.

Some of this rise of the last 3 years is justified by the roughly 71% growth seen in FirstCash’s revenues from 2016 to 2019, which translated into a 174% growth in Net Income. The significant jump in revenue and net income figure could be attributed to the FirstCash – Cash America merger in September 2016. The FY 2017 results include the results of operations for Cash America hence the spike in the top and bottom-line figures. 

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While the company has seen steady revenue and earnings growth over recent years, its P/E multiple has decreased. We believe the stock is likely to see a significant upside despite the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 78% Change In FirstCash Stock Between 2016 And 2019? has the underlying numbers.

FirstCash’s P/E multiple changed from 26x in 2016 to 21x in 2019. While the company’s P/E is around 16x now, there is a potential upside when the current P/E is compared to levels seen in the past years. P/E of around 21x at the end of 2019 and 2018.

So what’s the likely trigger and timing for upside?

FirstCash operates more than 2,700 retail-based pawn stores across the U.S. and Latin America. It provides pawn loans to help customers meet small short-term cash needs, which are offered against jewelry, electronics, tools, appliances, sporting goods, and musical instruments, etc. Due to the Covid-19 crisis, the company has suffered a drop in pawn loan origination demand driven by lower consumer spending, economic lock-down, and government stimulus programs which have negatively affected the company’s top line. Further, the exit from the unsecured consumer lending business will affect its total revenues, although the impact is unlikely to be significant. On the flip side, the company has a strong retail presence across locations and is a market leader in its segment. Further, the easing of lockdown restrictions in most of the world is likely to help consumer demand, leading to an improved trajectory for FirstCash’s revenues over the second half of the year.  

Additionally, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.  

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