First Cash: Getting Bigger and Better

A huge addressable market: That's a vital common denominator of companies that enjoy years of rising earnings. It's also a major reason I like pawn-shop operator First Cash Financial (FCFS - commentary - Cramer's Take). A close examination of what the company is doing with those earnings shows it's using them wisely, and that could make First Cash an investment worth keeping.

Consider these numbers: In the U.S., we have 300 million people and 12,000 pawn shops, or one pawn shop for every 25,000 people. Mexico, however, has a population of 106 million and just 1,250 pawn shops, or one pawn shop for every 85,000 people.

Scaling up Mexico to the same pawn-shop density as the U.S. makes it likely our neighbor to the south can support an additional 3,000 stores. Because 80% of Mexico is "unbanked," according to First Cash's research, this enormous untapped market means the alternatives these nonbank consumers turn to have plenty of room to grow before they hit saturation (think of McDonald's (MCD - commentary - Cramer's Take) in the early 1970s, before its store count tripled).

Today, the Arlington, Texas-based First Cash has 149 pawn shops in Mexico, up from just four in 2001. Eventually, First Cash expects to have 500 to 600 stores in Mexico. Management believes 80% of Mexicans are potential customers, in part on the basis of the "unbanked" statistic noted above, vs. just 20% to 25% of Americans.

Basics of the Business

Although pawning carries a stigma, using valuables such as jewelry as collateral to borrow money has long been a source of capital for people in times of need. Pawning activity goes back at least 3,000 years to China, and it is also described in the histories of the Greek and Roman civilizations, according to the National Pawnbrokers Association Web site. When Christopher Columbus asked Queen Isabella to help finance his scheme to find a shortcut to the Indies, she reportedly pawned her jewels.

Pawnbrokers like First Cash make money two ways: on the interest customers pay when they use merchandise as collateral, and when stores sell merchandise that customers do not claim because they defaulted on their loans.

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At the time of publication, Heiserman was long First Cash Financial, although holdings can change at any time.

Hewitt Heiserman conceived the Earnings Power Chart and the Earnings Power Staircase. A graduate of Kenyon College with distinction in history, Heiserman is a member of the Boston Security Analyst Society and the CFA Institute. He also authored It's Earnings That Count. For additional information, please visit www.earningspower.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback; click here to send him an email.

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