FirstCash: Strong Core Pawn Results, But Some Yellow Flags Elsewhere

Core Insights - FirstCash reported better than expected results for Q2, with revenue up approximately 1% and significant growth in the U.S. pawn business, which saw a 20% increase in revenue [10] - The company experienced healthy growth in pawn receivables, with 11% same-store growth in U.S. operations and 8% growth in Latin American operations [3] - The AFF POS business showed signs of weakness, with a 2% decrease in transaction volume and a significant 20% decline in same-door transaction volume [4] Financial Performance - Overall gross margin improved by 60 basis points, leading to a 13% growth in adjusted EBITDA and an 18% increase in adjusted operating income [10] - U.S. pawn revenue rose by 20%, with core pawn revenue up 19% and retail sales increasing by 17% [10] - Latin American pawn operations saw a 4% revenue increase in constant currency, with core pawn operations growing by 5% [10] Market Outlook - The economic environment is favorable for pawn lending, with expectations of continued strong performance through 2024 and into 2025 [11] - The company anticipates robust revenue growth of around 7% in the long term, driven by profitable growth in U.S. operations and expansion in Latin America [9] - Concerns exist regarding the regulatory environment in Mexico and potential challenges in the AFF business, which may impact future performance [6][11] Valuation and Investment Perspective - FirstCash shares are currently down about 10% from previous assessments, with the stock viewed as undervalued but not at an ideal price point for aggressive investment [6][13] - The fair value of the stock is estimated to be in the range of $120-$125, contingent on improved margins and transaction volume growth in the AFF business [9]