In addition to its pawning business, First Cash also operates 126 payday-loan stores, 80 of which are in Texas. A payday loan ranges from $100 to $1,000 and is repaid within 31 days. Because First Cash does not use the "bank model" in any state, it is not subject to FDIC regulations. And because monthly service fees (a kind of interest rate) for payday loans are 10% to 20% a month, consumer advocates claim businesses like First Cash make most of their profits by trapping borrowers, especially women and minorities, in a cycle of revolving debt. Rick Wessel, First Cash's president, says his customers include both sexes and all income levels. "We are an alternative for quick, easy loans."

Strong Results

First Cash reported second-quarter earnings last week, and the results sparkled. For the June 2006 quarter, the company earned $6.5 million, or 20 cents a share, a 25% gain vs. diluted earnings per share of 16 cents a share a year ago. The June quarter also marked the 22nd consecutive quarter of double-digit EPS growth. Same-store sales rose 15% over the year-ago quarter.

For 2006, management raised guidance to earnings of 94 cents to 95 cents per share, which is a 25% gain over 2005 results.

Authentic Earnings Power

First Cash has a track record of generating high-quality profits, as we see below. Not only have GAAP profits risen every year during 2002-05, but defensive and enterprising profits also have gained.

The defensive income statement is unique in that it expenses investment in fixed and working capital because they are uses of cash. Of special interest is the improvement in the defensive profits-GAAP ratio, which means First Cash is doing a better job of turning its reported profits into free cash flow.

The enterprising income statement is unique in that intangible-growth-producing initiatives like R&D are depreciated over their expected useful life, and the real, albeit noncash, cost of stockholders' equity is expensed. Because First Cash has $158 million of corporate net worth and zero debt, the 2005 enterprising profits gets dinged by about 55 cents a share, I estimate. In the GAAP and defensive ledgers, stockholders' equity is free because it is a noncash charge.

Strength in both defensive and enterprising ledgers is required for a company to possess authentic earnings power. First Cash has authentic earnings power, as the Quality of Profits chart shows.

Turning to the Earnings Power Chart, we find that not only does First Cash possess authentic earnings power, but that it is also forging an Earnings Power Staircase. When a company forges an Earnings Power Staircase, this is your hallmark of conservative growth. Not only is the company getting bigger, it is also getting better.

Discount to Intrinsic Value

To estimate First Cash's intrinsic value, I constructed three growth scenarios, shown below. In my "low" scenario, base-year GAAP earnings of $28.2 million grow 12% a year for the next five years, while my "medium" growth rate is 15% a year. My "high" growth rate is 20% per annum, which matches the consensus estimate of the six analysts who follow First Cash. Under all three scenarios, growth slows to 10% a year in years six through 10, 4% a year in years 11 through 15, and 3% beginning in year 16.