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Should you buy Cash Converters International Ltd on today’s news?

Cash Converters International Ltd (ASX: CCV) announced a net profit after tax (NPAT) of $6.3 million for the first quarter of 2017. It also confirmed its previous NPAT guidance of $20 million to $23 million for the full year. The market barely responded to the news, with shares trading down 2% this afternoon.

The company has had a torrid time of it of late with class actions and compliance issues related to its lending practices hurting profitability and the share price. The stock has sunk 73% since peaking at $1.46 in early 2013.

The company is in the process of transitioning its UK division to franchise only and shrinking its Small Account Credit Contract (SACC) loan book. Its SACC business has caused most of the regulatory headaches endured over recent years and both these moves should reduce lending risk.

Like listed peers FSA Group Ltd (ASX: FSA) and Money3 Corporation Limited (ASX: MNY), Cash Converters is looking to grow its automotive finance arm. The company hopes that this will fill the void left by the shrinking SACC segment.

At the midpoint of 2017 guidance, Cash Converters is trading on a price-to-earnings ratio (PER) of 8. At these levels, zero growth is required for the stock to be decent investment as the dividend alone is worth 12% when grossed up. Of course, this also assumes things don’t deteriorate from here.

Personally, I'll be giving Cash Converters a wide berth as I prefer buying high quality businesses even if that means paying a little more. This approach partly explains how this man turned $10K into $8 million.

Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more.

Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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