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Published: June 22, 2010
There are literally thousands of companies that have been built
on how people behave. Most of the time, these companies exist to
serve people's demands for something convenient, necessary or
entertaining.
But some companies exist because everyone is prone to mistakes.
These are the kinds of investments Peter Lynch always sought
out, because they are seen as being somehow distasteful. One
such "distasteful" investment is in household budgeting. Most
people just plain stink at it. If they aren't prepared when
disaster strikes, they need a helping hand.
That's where World Acceptance Corporation (Nasdaq: WRLD)
comes in. The company has been around for more than 40 years and
is one of the last remaining companies to offer unsecured
installment loans. Some may remember companies like Beneficial
or AVCO, which provided unsecured personal credit lines. All
those companies got eaten up by larger financial entities,
leaving players like World Acceptance to stay the course. It's
done so in a very profitable manner.
World's success isn't just based on the fact that people fail to
make ends meet -- poor budgeting gets them into World's offices.
But what keeps them there are three great aspects to World's
loan structures.
First, World offers loans that are large enough to make a
difference. Unlike the payday lender, which offers loans of
around $500 for a period of two weeks, installment loans last an
average of nine months at World (although the term is usually
twelve months), and the average
principal is about a thousand bucks.
Second, World uses the "Rule of 78s" when calculating a
borrower's payment. Under this model, the customer makes the
same size payment each month, but the interest is front-loaded.
For a 12 month loan, 12/78ths of the finance charge is assessed
as the first month's portion of the finance charge, 11/78ths of
the finance charge is assessed at the second month and so on
until the 12th month, when 1/78ths of the finance charge is
assessed.
This is important because it plays into the
third great aspect of World's business -- frequent refinancing.
More than 70% of World's customers refinance their loan in the
first few months. So if a customer refinances after three
months, World has collected 33/78ths (42%) of the interest on
the original twelve-month loan and issues a new loan again with
front-loaded interest.
World Acceptance has been expanding aggressively during the past
few years, almost doubling the store count (from 579 to 949) and
receivables portfolio (from $352 million to $770 million) since
2005. Management has been extremely cautious about opening
stores in states that aren't friendly to the business from a
regulatory standpoint, so it has faced very few legislative
battles (and because payday lenders get all the attention). The
company has also dipped its toe into Mexico and plans to open 15
offices there in 2011.
Management has deployed capital wisely and enjoys superior
credit terms with its backers. The company has drawn down $99
million of a $238 million credit facility at a mere 4.25%.
Considering it then turns around and lends this money to
customers at APR's exceeding 100%, it's no wonder the company
has pumped out $450 million in
free cash flow during the past three years. World has also
bought back $150 million of its own stock during the past 10
years. In fact, when the stock hit a speed bump in April and
May, one insider scooped up more than 360,000 shares.
Action to Take --> There
will never be a shortage of customers for World Acceptance,
because people will always budget poorly. With analyst estimates
predicting +15% earnings growth and the company trading at only
10 times earnings, this is a chance to own a
cash flow machine at a -33% discount. And if insiders are
buying, you should too.
-- Frederick Steier
Contributor
StreetAuthority |
