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Author: emiller8988 Big red star, 1000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1264  
Subject: the FCFS scream Date: 8/25/2004 1:38 AM
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did you see where The Scream, a painting by Edward Munch was stolen recently... famous painting, for the sake of culture you can see it here.

http://www.museumsnett.no/nasjonalgalleriet/munch/eng/innhold/ngm00939.html

First Cash Financial Services participates in two parallel subsegments of the consumer lending market, both of which meet consumers' needs for short term borrowing. FCFS primarily serves that segment of the population which lacks credit cards or access to traditional bank financing, by meeting their needs for short term liquidity, e.g. check cashing, bill payment or small loans.

To do this, the Company operates a chain of 180 pawn stores, which make loans to individuals that are collateralized by pledged personal property, and they also retail previously owned merchandise acquired through loan forfeitures. FCFS also owns a number of check cashing and payday advance stores, including about 40 service kiosks located inside convenience stores operated under a 50% owned joint venture with Circle K. The numbers come from the June 10-Q...

The balance sheet looks great to me. Here are the assets

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, December 31,
-------------------- -------------
2004 2003 2003
------- ------- -------

ASSETS
Cash and cash equiv $ 20,083 $ 12,511 $ 15,847
Sx charges rec 4,208 3,351 3,918
Pawn receivables......23,063 18,622 20,037
Short-term advance
receivables, net of
allowance of $464,
$390 and $497,
respectively........13,069 10,159 13,759
Inventories...........16,471 13,248 15,588
Prepaid expenses 1,114 523 964
Income taxes rec 3,044 457 1,613
------- ------- -------
Total current assets ..81,052 58,871 71,726
Property and
equipment, net.......16,104 12,454 14,418
Goodwill.............. 53,237 53,194 53,237
Receivable from
Cash & Go, Ltd........ 5,155 -
Other....................739 537 683
------- ------- -------
$151,132 $130,211 $140,064

they made the Forbes Best 200 new companies... for what that's worth
http://tinyurl.com/7xwxh

the liabilities are small and very rapidly getting smaller

Accounts payable..$ 832 $ 560 $ 1,054
Accrued expenses.... 6,692 9,414 9,832
------- ------- -------
Total current
liabilities ...... 7,524 9,974 10,886
Revolving credit
facility............17,000 6,000
Deferred income
taxes payable........6,555 5,524 5,955
------- ------- -------
14,079 32,498 22,841
------- ------- -------

the last quarter was great. The headline was...
First Cash Financial Services Reports 25% Increase in Second Quarter Earnings Per Share; 27 New Stores Opened to Date in 2004
read all about it here
http://news.moneycentral.msn.com/ticker/article.asp?Symbol=US:FCFS&Feed=PR&Date=20040715&ID=3824922

they announced a share re-purchase program along with the quarter results... sounds great!
ARLINGTON, Texas, July 15 /PRNewswire-FirstCall/ -- First Cash Financial Services, Inc. FCFS today announced that its Board of Directors has approved the repurchase of up to 1,600,000 shares of First Cash common stock depending on prevailing market conditions. This is the only stock repurchase currently authorized and represents approximately 10% of the Company's total outstanding shares, at its maximum.

sales and rev growth over the past 5 years has been great, 20%+

growth over the next five years should be great, estimated to be greater than 20% and the present PE is 15.

stock options don't look abusive... there were 1.8mill options and warrents outsanding last year but as of the June quarter that dropped to 1.2million
the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions would be as follows

Earnings per share:
Basic, as reported $ 0.26
Basic, adjusted $ 0.26

Diluted, as reported $ 0.25
Diluted, adjusted $ 0.24


The fair values were determined using a Black-Scholes option-pricing model using the following assumptions:

Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------ ------ ------ ------
Dividend yield - - - -
Volatility 52.7% 58.1% 52.7% 58.1%
Risk-free interest rate 3.5% 3.5% 3.5% 3.5%
Expected life 5.5 years 7 years 5.5 years 7 years

so what's the problem? why did shares drop after the last earnings announcement. I decided to re-read the 10-Q and read every word.

way down in the footnotes....
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
there were these two items...

2. The stockholders approved the adoption of the Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock from 20,000,000 to 90,000,000.

FOR % AGAINST % ABSTAIN %
--------- ---- --------- ---- ------- ---
10,802,773 69.2 4,742,769 30.4 66,089 0.4
*
*

3. The stockholders approved the adoption of the First Cash Financial
Services, Inc. 2004 Long-Term Incentive Plan.

FOR % AGAINST % ABSTAIN % NON-VOTE %
--------- ---- --------- ---- ------- --- --------- ---
5,894,643 53.1 5,201,825 46.9 127,218 - 4,387,945 -

what? there was a Long Term incentive plan and it carried by 35%!!!!! of the available votes. That when I started screaming. What is God's name did the incentive plan include?

well, I went back to the SEC and got the proxy statement
http://www.sec.gov/Archives/edgar/data/840489/000092623604000062/fcf2004defpxy.txt

and I read it. I found out about SARs (which I thought was a Chinese infection that people from Toronto also got. Turns out a stock incentive plan can catch SARs too...

Stock appreciation rights (SARs) and phantom stock are specialized deferred compensation techniques designed to provide employees with the economic benefits of stock ownership without any actual transfer of stock occurring. SARs and phantom stock are commonly used in situations where companies are unable or unwilling to alter their existing ownership structure, but nevertheless wish to provide employees with incentive compensation based on the actual performance of the business. SARs and phantom stock are popular with family owned businesses and companies wishing to provide equity based incentives to foreign employees. They also can be used to provide equity incentives that are tied to performance of a corporate division or subsidiary.

This is an absolutely great company. They've got a very interesting moat in that they are developing economy of scale in a wildly fragmented industry. They also have a very interesting was of keeping track of their pawn loans outstanding and can alter on a day to day level what they will loan on a pawn item... depending on weather they want the item(s) redemed or re-sold. They are applying business savvy to an old mom and pop idustry. The growing minority population of the US is very familar w pawn shop practice esp our hispanic friends. As they are the fastest growing demographic... FCFS stands to benefit big time.

There is clearly a big problem with the stock incentive plan. I'm not sure I fully understand it but when I note that insiders control30%+ of the company and the plan passed by precious little more than that percent... it is an obivous red flag.

Still at this moment in time... this is a great company by the numbers. A DCF using 5 years of 20% growth then straight to terminal 3% growth would be wildly conservative so I used it. A risk free rate of 5% and equity risk of 5% for a discount of 10%... a WACC of 10% (high)... current NOPAT of 17%...
still yields a value of around $23 bucks a share and the current share price is $18.3 after alot of folks "voted" on the incentive plan with their feet.

well the plan is there but they haven't acted on it... management got hurt feelings when the share price took it's recent dive and announced their earnings early... and the results were very good. How they'll react to the vote remains to be seen. If I were sure that the managers/insiders were acting on my behalf... I'd say this stock is a screaming buy for the next 15-20 years. I've staked out an initial position. If the managers are my partners, this is a wonderful purchase... if they plan to fleece me and my fellow marginal shareholders... it'll be me doing the screaming. Why isn't investing easy?

e

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