FirstCash Inc: Pawn Shop Stock to Benefit from the Economy Reopening?

FirstCash stockFirstCash Stock’s Price Weakness Means Opportunity for Investors

The full impact of the COVID-19 pandemic is not fully known, but it has been brutal and devastating to tens of millions of Americans who have lost their jobs. The proposed $1.9 trillion stimulus by President-elect Joe Biden will help, but the reality is that many Americans need other options.

For some, an immediate solution could be the selling of personal assets in order to get much-needed cash. As the economy reopens and people look to sell their personal goods to supplement their incomes during hard times, FirstCash Inc (NASDAQ:FCFS) could benefit.

As an operator of more than of 2,700 retail pawn shops and consumer lending locations, FirstCash could be an ideal play on the reopening of the economy.

FCFS stock trades at $59.54 at the time of this writing, just above its 52-week low of $51.15 in October 2020 and well below its 52-week of $90.56 in January 2020. I view this as a contrarian opportunity.

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The one-year chart of FirstCash stock shows a technical deterioration that indicates the current bearish conditions. FCFS stock had two major breakdowns in 2020, in March and November, prior to an upside gap breakout that drove the stock back to $75.00.

FirstCash stock failed to hold at $75.00, and it has been on a decline below its 50-day and 200-day moving averages, toward trendline support at $55.00.

Chart courtesy of StockCharts.com

While the current technical picture is bearish for FCFS stock, the sell-off is technically oversold, which provides a good risk/reward ratio. FirstCash stock appears set to rally after the recent emergence of a bullish golden cross pattern. Watch for initial resistance at $65.00–$71.00.

Free Cash Flow Machine Makes FCFS Stock Enticing

FirstCash Inc has generated more than $1.0 billion in revenues annually during the past four years, marking four consecutive years of growth.

Fiscal Year Revenues Growth
2015 $704.6 Million N/A
2016 $1.09 Billion 54.5%
2017 $1.78 Billion 63.5%
2018 $1.78 Billion 0.1%
2019 $1.86 Billion 4.7%

(Source: “FirstCash Inc.” MarketWatch, last accessed January 18, 2021.)

I expect to see revenue stalling due to the store closures during the pandemic, but as the economy reopens, FirstCash Inc should benefit.

Analysts estimate that FirstCash will report a revenue decline of 12.5% to $1.63 billion in 2020 and a 0.8% revenue decline to $1.62 billion in 2021. (Source: “FirstCash, Inc. (FCFS),” Yahoo! Finance, last accessed January 18, 2021.)

I feel that the consensus analyst estimate for 2021 may be somewhat conservative, depending on the state of the economy.

The company has been generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA), with growth in four years straight to a five-year high in 2019. Note that the company’s EBITDA growth rate superseded the revenue growth rate in 2018 and 2019.

Fiscal Year EBITDA (Millions) Growth
2015 $131.7 N/A
2016 $180.3 36.8%
2017 $272.2 51.0%
2018 $283.2 4.0%
2019 $300.5 6.1%

(Source: MarketWatch, op. cit.)

FirstCash Inc has also managed to turn out consistent profits on both a generally accepted accounting principles (GAAP) and adjusted earnings-per-share (EPS) basis. The company’s GAAP profits per share came in at a five-year high in 2019.

Fiscal Year GAAP Diluted EPS Growth
2015 $2.14 N/A
2016 $1.72 -19.6%
2017 $3.00 74.4%
2018 $3.41 13.8%
2019 $3.81 11.6%

(Source: MarketWatch, op. cit.)

Adjusting for non-operating items, FirstCash Inc is expected to report an adjusted $2.98 per diluted share in 2020 and $3.37 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)

At the same time, FirstCash has been generating positive free cash flow.

Fiscal Year Free Cash Flow (Millions) Growth
2015 $71.7 N/A
2016 $63.0 -12.1%
2017 $183.3 190.9%
2018 $187.8 2.5%
2019 $112.6 -40.0%

(Source: MarketWatch, op. cit.)

Analyst Take

The current bearish bias against FirstCash stock represents a good risk/reward opportunity for investors.

Institutions and insiders have been buying FCFS stock. About 320 institutions own FirstCash stock, and insiders have purchased 80,000 shares over the last six months. (Source: Yahoo! Finance, op. cit.)

FirstCash Inc runs an important service for many Americans who are struggling financially. The pawn business may be frowned upon by some, but the access to immediate cash it provides to people will be vital in 2021.