Is Cash Converters International Ltd a jackpot stock?

Yesterday, shares in Cash Converters International Ltd (ASX: CCV) jumped 10% on the back of a stellar first quarter performance across most of its business units, when compared to the prior corresponding period (pcp).

Although it is perhaps better known for its range of second-hand goods, Cashies is a company which derives a majority of its earnings from payday loans. In fact, in the first quarter of FY15 its “Financial Services – personal loans” business accounted for over 56% of divisional EBITDA, before head office costs.

Highlights from yesterday’s update include:

Financial Result Q1 FY15 ($ million) Variance over previous corresponding quarter
Revenue $97.23 Up 26%
EBITDA $15.97 Up 79%
EBIT $13.84 Up 96%
Income Tax $3.74 Up 333%
Finance Costs $2.38 Up 32.5%
Net Profit After Tax (NPAT) $7.72 Up 76%
Divisional EBITDA
Franchise Operations $1.64 Up 3%
Store Operations $4.73 Up 148%
Financial Services – Administration $2.97 Up 11%
Financial Services – personal Loans $11.75 Up 38%
Green Light Auto (after minority Interest) $(0.190) Down 1.6%
Total Before Head Office Costs $20.93 Up 44%
Corporate Head Office Costs $4.96 Down 10.5%
Total Divisional EBITDA $15.96 Up 79%

Source: Cash Converters 1Q15 Trading Update

At 30 September 2014, the company’s personal loan book increased 23% to $105 million. Online personal loans in Australia continued to perform strongly, increasing the total value of loans written to $13.1 million for the period, up 111% over the pcp. The value of online cash advance and personal loan products approved during the quarter increased 112% to $15.4 million.

Bad debts increased to 7.2% (1Q13: 6.6%) at 30 June 2014 but are within the historical range for the business. The company’s UK operations – where it has 58 stores – produced an EBITDA loss of $121,406, compared to a profit of $301,466 last year.

Cash Converters’ Managing Director Peter Cummins said the result was “pleasing” and that the group would consider more acquisitive growth in the future. The head of the business confirmed: “Our financial performance has been improving strongly with our normalised EBITDA up 61% over the previous year… In addition we are considering opportunities across the Cash Converters network for further acquisitions.”

Although the small-loan personal finance sector is competitive, with the big banks consuming much of the market and rivals like Money3 Corporation Limited (ASX: MNY) and Thorn Group Ltd (ASX: TGA) also looking to increase their share; in the long-term Cash Converters has a number of areas in which it can pursue growth.

Buy, Hold, or Sell?

Cash Converters is a well run growing company with a track record for market-thumping returns. In 2013, the group’s share price was almost chopped in half when legislative change, regarding the fees charged on small-loans, had an adverse impact on profits. Indeed, since 2012 the proportion of group EBITDA derived from “Financial Services – administration” has fallen from 23.7% to just 14.2% today.

However, anyone who took my advice less than a year ago and bought the stock, would today be sitting on capital gains of 40% plus dividends. But if you think you missed your opportunity to buy this solid growth stock, think again. At under $1.10 per share, long-term investors could do a lot worse than add Cashies to their portfolio.

Cash Converters is already in my long-term portfolio and still presents a compelling long-term opportunity. However it isn't the only great investment on the ASX for you to consider. In fact, our top investment advisor Scott Phillips has just released his #1 stock pick for 2015 and I think the stock is a GREAT buy at today's prices! Best of all: You can get his full report on this ultra-promising ASX stock for FREE.

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Motley Fool Contributor Owen Raszkiewicz owns shares in Cash Converters International Ltd.  

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