Another industry player tells me they are in “full-on panic mode.”
Payday lenders cannot operate this cash-intensive business, engaging in more than 100 million transactions a year, when no bank will permit them to even have an account.
How Is This Actionable?
Your investment move depends on how you think things will turn out.
As far as the banking issues are concerned, I’m sure the payday lenders are seeking other options, but I don’t know what they are, and I’m not sure it matters. If Operation Choke Point is actually threatening banks, it stands to reason that the DoJ and other involved agencies could threaten anyone else who tries to do business with the lenders.
If you agree, my move would be to sell or short the publicly traded payday lenders: Cash America International (CSH), DFC Global (DLLR), EZCorp (EZPW), First Cash Financial Services (FCFS) and QC Holdings (QCCO). In fact, I am sufficiently concerned that I have taken short positions in some of them (see disclosure below).
At a minimum, all revenue from payday is at risk because a company cannot conduct business without a bank account. If you examine the 10-K’s of each company, you’ll see their U.S. payday revenues exceeds their net income, with the exception of First Cash. Only 7% of its FY13 revenue came from payday, although subtracting that amount from net income is a 50%-plus EPS cut:
If you think the industry finds a way out of this – and it might — then you evaluate each company on its own merits, product mix, cash flow and valuation … just as you would any other stock.
Are Big Banks Affected?
Major financials such as BofA, US Bancorp and JPMorgan Chase (JPM) appear to be leaving the space, so they stand to lose the revenue from the payday relationships. However, consumers who can no longer access payday loans will go back to what they did before the product existed — bouncing checks — and overdraft revenue will rise.
But none of this should make a big dent in revenue, and considering how diverse big financials’ streams are, you shouldn’t let this change your investment strategy in the industry.
Lawrence Meyers is short, and holds put options on, FCFS, CSH and EZPW. He is long BAC. His short positions were opened on March 25, shortly after the release of the CFPB’s paper on its intent to announce rules on the industry in the near future.