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    Lessons From ‘Pawn Stars’

    I’m not much into the genre of pop television comically referred to as reality shows. But I know darn well that I’m in a small minority as millions of Americans and millions more people around the globe are rabid fans of shows that range from “Jersey Shore” to “The Apprentice.”

    There seems to be a show for just about any group of folks from nearly every walk of life who are just itching for their 15 minutes of fame — even if that fame is for filming them doing the most inane things.

    One such show is “Pawn Stars.” It’s found on the History Channel, which I guess is running out of educational shows on U.S. and global history. Instead, it airs a show about a collection of pawnbrokers in Las Vegas and their dealings with customers and anyone else who just happens to show up for a cameo.

    Fortunately, I’ve never had any reason to visit a pawn shop in Las Vegas or any other city. But in my home town of St. Louis — just around the corner from what was the headquarters of A.G. Edwards and is now Wells Fargo Advisors — was a famed pawn shop called Sam’s EZ Loans.

    Friends of mine who went to the nearby Saint Louis University School of Law would mention that Sam’s EZ Loans agreements were often used as case studies for contract and other law classes.

    Pawn shops offer an interesting mix of financial lending, the pledging of assets and the liquidation of the pledged assets.

    But pawn shops have moved well beyond basic services to become much more for a greater number of customers.

    Bad Times Good Times

    The economic and financial woes stemming from the summer of 2007 and the mortgage meltdown did a lot of damage to a great number of people up and down the economic spectrum. Folks who had been in pretty good financial shape saw their leveraged homes destroy their wealth and even put them into financial ruin.

    With that ruin came credit troubles.

    Having bad credit or no credit affects your credit rating. You will have issues getting any loan or lease for cars or homes, but it will also potentially lock you out of being able to have many sort of credit cards and, more importantly, being able to open and maintain bank accounts.

    Banks don’t like folks with bad credit. So when customers with credit issues try to open accounts, banks simply tell them to try another bank.

    No bank means trouble cashing checks — even from employers. And no check writing (paper or electronic) means paying bills with cash or money orders — until recently.

    Pawn shops are increasingly getting into the business of consumer finance. They have been in the business of providing loans against pledged items such as guns, jewelry and electronics, as well as other goods that can be resold.

    As more folks rely on such loans, pawnbrokers are doing well. They are also getting into other businesses, ranging from check cashing to bill paying to money transferring. They are even providing additional loan and cash-advance services, including credit and debit cards.

    The industry isn’t just focusing on the lower end of the economy’s population. Pawnbrokers are stepping into a widening gap in the financial markets as more and more banks are reducing their retail offerings to smaller accounts.

    For those small accounts, banks have been increasing fees. In the process, they have been driving away many potential customers that have OK credit but don’t have big bank balances.

    These less-wealthy people still need somewhere to cash checks and pay bills, and they need access to other consumer financial products and services.

    That’s bad for banks, but good for the pawnbrokers.

    R-E-S-P-E-C-T

    The pawn business is very fractured. There are plenty of local shops, such as the one featured on “Pawn Stars.” But a consolidation has been underway recently. Public companies are buying small operations and expanding them nationwide and even into other non-U.S. markets, including Mexico and other markets.

    These public pawnbrokers are also dressing up their locations to appear to be like any major financial company or bank branch, as well as stores with goods for sale that look like many national retail chains.

    In doing their clean-up and appearing less seedy, successful pawnbrokers are gaining respect, opening them up to neighborhoods and customers that in the past never would have accepted a pawn shop unless it was a dire need.

    Respect is now part of the pawn business. Because of that, a few pawnbrokers might be just the thing to add cash flow to your portfolio.

    Cash In

    I’ll start with Cash America (CSH). This Fort Worth, Texas- based pawnbroker operates in the United States, United Kingdom and Sweden.

    Cash America offers the traditional non-recourse loans any pawn shop does, but it also has been ramping up the newer ancillary financial products and services noted above.

    In doing so, just check cashing has soared over the past three years by more than 500 percent. And cash-advance lending has climbed to become the largest source of revenue — up more than 29 percent over the past few years.

    It has also served its customers well, so it has a retention rate of more than 96 percent.

    Cash America’s business is so good that its returns on assets and its shareholders’ investment are multiples of the industry standards when comparing its financial performance to a traditional financial lender.

    It doesn’t offer much of a dividend, but the market has been liking the stock — despite the interest rate concerns of the general market of late and the ever-present regulatory oversight.

    Next is EZ Corp (EZPW), based Austin, Texas. The company has a similar strategy as Cash America, offering pawn and other loans along with cash services in the United States and into some Latin American markets.

    Revenues are up on an annual basis by some 14 percent, and it has a 100 percent customer retention rate.

    Again, there’s not much of a dividend. But with a rising market for the sector and its own industry performance, the market should be pricing the shares better.

    The last one is Arlington, Texas-based First Cash Financial Services (FCFS).

    Like the other two pawnbrokers, First Cash has been expanding its business to include a broader series of financial products and services. And it operates nearly evenly between the U.S. and Mexican markets.

    Revenues keep climbing, with the past three years’ average annual gains running more than 17 percent.

    With a 100 percent retention rate, more customers coming in the door means more and more continued business.

    Like the others, it doesn’t offer much of a dividend. But of the three pawnbrokers, its stock has the best near-term track record over the past year.

    So buy a few shares of each and you too can be a “Pawn Star.”

    — Neil George

    Neil George is the editor of By George, an investment advisory publication. George was the editor of Personal Finance for many years. In addition, he served as editor for a collection of other investment journals published in the United States, Germany and other selected nations. Prior to his career in media, George worked for more than two decades on six continents in senior positions with a select group of financial institutions in investment banking, bond trading, brokerage and asset management. The institutions included Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and British- and Chinese-based Investec PLC. In addition, George worked to build a collection of independent public and private brokerage and fund-management companies in Los Angeles and New York. He also currently serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. George earned an MBA in international finance from Webster University in Europe and a bachelor's degree in economics from Kings College.

    | All posts from Neil George

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