Call of the Week: A Value Play That Pays

Robert Maltbie  |

This week at Singular Research, Senior Equity Analyst Greg Garner told us that Cash Store Financial (CSFS) was his call of the week as an interesting value play. The company provides payday loans and other short-term financial products in Canada, but is expanding into other markets like the U.K. Cash Store Financial could be considered pretty cheap, trading at 4x EV/EBITDA and we think it could be poised for a rebound after three tough quarters of higher costs and regulatory headwinds. Investors should note that its also buffered by a 7-percent dividend yield, and we think it could be a solid play on the January effect.

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The company serves as a broker for loans, so it doesn't take on credit risk with its own funds. We expect Cash Store Financial to post strong earnings growth in the next few years as it rebounds from the regulatory rate compression, introduces new products, attracts new customers and continues to expand into the UK. Our earnings estimates see growth of 65.1 percent in 2012 and 37.1 percent in 2013, and a 10 percent to 15 percent long-term growth rate is sustainable after 2013. The company also has a history of growing at a greater rate than the industry. Therefore, we believe a 18x to 25x multiple on 2012 EPS is justified in the next year as the company reports progress on several growth initiatives. Applying a PE multiple of 18x PE to our 2012 EPS estimate translates into a price target of $15.48.

The company beat our fourth quarter estimates, earning $0.12 per share versus our estimate of $0.06 per share. Revenues also declined 5.2 percent to $47.2 million, better than our forecast of a 9-percent decline. Providing that new product focus for Canadian branches and new branch roll-out in the UK will drive revenues and margins and cash flows remain strong enough to support the new branch roll-out and dividend, Singular reiterates our BUY rating on Cash Store Financial.

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