As the economy improves, more people want to use credit for purchases. This can be in the form of paying for or renting household goods all the way to personal unsecured loans for large amounts of money. Personal credit and leasing service providers can do good business and can be good investments due to their attractive profit margins and steady amounts of customers.
Second-hand goods retailer and personal loan consumer finance company Cash Converters International Ltd (ASX: CCV) is known for its pawn broking business as well as "payday loans", or unsecured personal loans. The business model has successfully grown revenue as it expanded its franchise chain in Australia and the UK.
Net profit has risen consistently since 2005, up almost 10 times. In the first half of FY2014, changes to the Australian regulatory rules in regards to payday loan interest rates and terms affected earnings.
In the second quarter, revenue and loan book value began to recover. Much of the loan volume growth came from improvements in mobile and tablet apps which allow easier loan applications for customers. In the second half, the company projects continuing loan book growth and better margins.
The stock made a high of $1.56 in May 2013, when the new regulations were coming into effect. It declined to a low of $0.78 in December. Since then, it has recovered to $1.08. Its PE is 13 and the dividend yield is 3.7%.
FlexiGroup Limited (ASX: FXL) provides vendor finance programs, credit card service, leasing and other payment solutions for consumers and businesses. Its most recognisable brands are Flexirent and Certegy. Customers at major retailers can use the service to buy household goods on credit as well as rent items.
Its share price hit a high around $5 in October 2013. The stock is trending down and is now $3.75. It has a 13.3 PE and a dividend yield of 4.1%.
It recently acquired the Australian and New Zealand businesses of ThinkSmart Limited (ASX: TSM), which operates a similar vendor finance and leasing service. The $43 million acquisition will expand Flexigroup's footprint in the retail store space as consumer spending is beginning to rise.
Full-year 2014 guidance is for a 17%-19% net profit increase.
Foolish takeaway
Although economic conditions may not dramatically improve over the next one or two years, the trend is heading upwards on the back of low interest rates and a weaker Aussie dollar. Consumers will want to purchase more and credit conditions allow easier financing.