Another point in CSF's favour is an increase in payday loan regulations. In most cases, the new provincial regulations allow the existing payday loan operations to still make a nice profit, but perhaps not nice enough if you're a small operator. CSF believes, and I agree, that the smaller players will be looking to exit the market. CSF sees this as a buying opportunity.
Another interesting feature of CSF is that upper management really pays close attention to operations. In my opinion this should be upper management's primary function. In too many companies however, operations is all but ignored in favour of strategizing, writing mission statements, backdating options, and creating golden parachutes. In contrast, CSF's upper management tours the country and meets each branch manager. Management examines the performance of each branch and creates a plan to bring the laggards up to speed or closes them.
This is also a good time in the consumer credit marketplace because other lenders are tightening their credit (see for example, Jim Jubak's blog post). This is just part of the continuing global deleveraging. This will drive more business to CSF.
Another couple of interesting points about CSF.TO.
- Its expansion is funded by cash flows.
- It has no long term debt
- It scored 100% on my piotroski screen (but ignoring p/b).
- It has a good dividend yield of 2.8% at $9.25/share.
- A low payout ratio of 32%
- It's making money. Pretty good these days.
- As a broker CSF isn't directly exposed to credit risk. However, CSF pays retention fees to its lenders to compensate them for losses due to defaults. So, indirectly, CSF does take on credit risk. If the economy goes south, defaults and retention fees will go up. Ouch.
- In a company that grows by opening new branches, there is always the possibility that EPS growth comes purely from new branches opening. Consequently, you want to be sure that same store sales are up too. While CSF's same store revenue has been rising, this rise is a function of the age of the store: the older the store, the lower the same store revenue increase (see page 24 of the 2008 AR). That's worrisome. CSF is in the process of developing of new products to increase revenues. Gotta keep an eye on that.
CSF earnings were a bit hard to analyse because it spun off its rent to own division on March 31 2008, and in Q3 2005 it eliminated "rollovers" which had a big negative impact on eps. I was able to eliminate the effects of the spin off by looking at segmented earnings in the annual reports. There were a lot of non-recurring charges as well, a few for the spinoff, another for a lawsuit that was just settled. However, I couldn't figure out anything comparable for to rollover fees. See below for eps for the last few years.
In the AR, management attributes the drop in earnings from 2006 to 2007 to the end of the rollovers. It seems to me that there is too long a time interval between the end of the rollovers and 2007 for that explanation to be completely believable.
Nonetheless, based on these data, I calculate that a 10 year investment in CSF has a discounted present value of 20.40$ (CDN)/share, where 3.5% is the discount rate. The problem with this estimate is that there's not much data to go on, and it's likely to be a bumpy ride.