This was originally sent to subscribers of TheStreet.com Breakout Stocks on March 9 at 9:21 a.m. EST. For more information on this newsletter, click here.While high-growth technology companies have a place in every investment portfolio, they represent only part of a diversification strategy. With that in mind, we often like to look for off-the-radar value-oriented names to complement our organic-growth stocks. One relatively unknown and attractive company in the banking field is Dollar Financial ( DLLR), whose shares we view as undervalued at the current quote of $14.84. If Dollar Financial was trading over $15, and if we did not already have two financial names in the model portfolio, we would add the stock to the Breakout Stocks portfolio. Dollar Financial, an international finance play, offers banking services such as short-term loans and check-cashing services to consumers in the lower- and middle-income brackets. The company operates 1,335 locations, with a majority of its revenue coming from its operations in the U.S. and Canada, and the remainder from its U.K. services. We believe the company will benefit in 2006 from cash-strapped consumers who have already exhausted other financing options, such as mortgage refinancing and credit cards. Dollar Financial's fiscal second-quarter earnings results, which were reported on Jan. 31, were ahead of Street estimates on both the top and bottom line. For the quarter ended in December, Dollar earned 32 cents a share on revenue of $80.7 million. Analysts were looking for EPS of 24 cents and revenue of $76 million. Strength in the quarter was driven by 18% revenue growth in Dollar's international business, which is benefiting from increased check-cashing and loan revenue. Also, strength from its recently launched installment-loan program, CustomerCash, provided upside to Street forecasts. Management said CustomerCash is already running ahead of its expectations based on its recent results. Dollar Financial launched the installment-loan program two quarters ago to make up for lost revenue in payday loans -- which are short-term loans made at very high interest rates -- because of tighter government regulation over the frequency of such short-term loans made to the same customers.
The company's guidance for the full year was comfortably ahead of analyst expectations and signaled management's confidence in its current business environment. For fiscal 2006, Dollar Financial forecast revenue of $312 million to $317 million, which is about $6.5 million ahead of the consensus analyst estimate and to a large degree reflects the company's strong revenue performance in the fiscal second quarter. The company had previously forecast 2006 revenue of $300 million. From a valuation perspective, Dollar Financial is the least-expensive name among its peer group. The stock trades at just 10 times 2006 analyst EPS estimates of $1.45 and nine times 2007 analyst EPS estimates of $1.73. Despite similar growth rates and operating models, Dollar's peers trade at an average P/E of 14 times 2006 and 11 times 2007 analyst EPS forecasts, according to estimates from research firm Jefferies. We believe Dollar Financial's alliance with Western Union strengthens Dollar's position as a leading player in the industry and could be a strong component for continued earnings growth. Western Union, a division of First Data ( FDC), has a presence in nearly 200 countries and allows Dollar Financial's customers to transfer funds to any Western Union location in the world. Other services provided by Dollar Financial should contribute to steady earnings growth in 2006 and beyond. For instance, the company offers a tax-filing service, which should see a significant pickup in business this quarter and next in the U.S. Also, Dollar's check-cashing business has shown steady growth in each of the past four fiscal years. The average fee charged per check has increased each of those years, from 3.5% of face value in fiscal 2002 to 3.76% in fiscal 2005. While the company has $270 million in long-term debt due in 2011, we believe its $100 million in cash and positive cash flow, coupled with increasing EPS, will support growth and capital expenditures near term for new locations and equipment. Also, management's 2006 guidance of $80 million to $82 million in earnings before interest, taxes, depreciation and amortization, or EBITDA, would cover the company's annual interest expense two times, and likely leave about $20 million in cash flow after its capital expenditures.
In addition, Dollar Financial is under the radar of mainstream analysts and investors. According to Bloomberg, just five analysts cover the stock, with no coverage from the large research firms. This is a sign that we are discovering the story ahead of the Wall Street herd, which should enable us to sell into strength as the bullish case for Dollar Financial gains traction with investors and new analysts. Also, the stock has a small float of shares of just 16.4 million, so good news will likely lead to a large move in price. Given our expectation for continued strong earnings results, we believe the stage is set for the stock price to continue appreciating in the coming year. And with just 40% of the stock owned by institutions and Dollar's market capitalization steadily on the rise, we believe larger buyers could begin to step in and help drive shares higher. With the financial industry under pressure from the Fed, we believe it makes sense to avoid the big names like Citigroup ( C) and Bank of America ( BAC), and stay open-minded to smaller companies with more differentiated business models, such as Dollar, or the M&A-focused investment bank we currently hold in the Breakout Stocks model portfolio. We have a number of interesting financials with excellent long-term potential on our radar screen, and will present them to subscribers as buying opportunities arise.