As Warren Buffett famously said, whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down. One quality stock recently hitting 52-week lows is Cash Converters International Limited (ASX: CCV).
Cash Convertors is involved in the sale of second-hand goods, franchising, personal loans and vehicle leasing. It runs 131 of the Cash Converters stores with a network of more than 750 stores in 18 countries. Cash Converters shares are down over 50% from their 2013 peak, giving investors an opportunity to pick up shares at a big discount.
Reasons for the share price decline are numerous, including: the Australian micro credit rate cap that came into effect mid-2013, the U.K. credit legislation that came into effect at the start of 2015, a New South Wales-based class action that settled last month for $20 million plus capped costs of $3 million, Carboodle (the vehicle leasing company) taking longer than anticipated to turn a profit, a tough 2014 financial year and a tougher 2015 financial year. Top it all off with a capital raising to terminate the Kentsleigh licenses being funded by an unfair placement offer and you can see why some have lost patience.
These are formidable challenges, but I believe the market has under-rated the strength of this company. For instance, cash advance levels in Australia have returned to "pre legislation change" levels and the new legislation has removed uncertainty and allows Cash Converters to plan ahead with greater clarity.
The termination of the Kentsleigh licenses resulted in a $30.8 million payout but will save the company $5.7 million per annum based on the current value of loans written, and more if the company continues to increase loans written.
The earliest information I could find on earnings per share (EPS) for Cash Converters showed the 2003 EPS at 2.05 cents per share (cps). Since then the EPS has increased to a high of 8.09 cps in 2013 but dropped back down to 5.67 cps in 2014. Even with the recent EPS reduction, that equates to a 177% increase from 2003 and with analysts expecting EPS in 2016 to hit 9.9cps, the share price could rebound nicely.
The settlement of the class action, which was for charging unlawful deferred establishment fees on small loans, will allow Cash Converters to focus its efforts on returning to growth. The $20 million settlement is half of the original claim of $40 million, and will be funded from existing resources. It is deductable for tax purposes. This action was settled without any admission of liability and I would hope that lessons have been learnt from this expensive exercise.
While there are definite risks to buying Cash Converters, investors with mid- to long-term time frames should be well rewarded. While waiting for Cash Converters to deal with what I expect are short-term problems, you can enjoy the 4 cents a year dividend, which is a yield of 5.71%, grossing up to a very respectable 8.2%.
