Description

World Acceptance (“WRLD”) is one of the largest (market cap - $131m)and the only publicly traded pure play in the highly fragmented direct, small-loan consumer finance industry. WRLD operates 441 offices in 10 states: South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico and Kentucky. WRLD serves a niche market within the consumer finance industry: low-income borrowers who do not have access to traditional credit sources offered by banks, savings institutions, or standard consumer finance companies. Most loans are for under $1,500 and mature in 15 months or less. Even with the economic downturn during 2001, WRLD was still able to grow the top line by 11.5%, increasing EPS by over 14% in spite of a 20% jump in loan loss provisions.

WRLD’s valuation has been hurt, not because of operating performance, but because analysts have grouped it with some of the other consumer finance companies that were not prepared for the recent economic downturn. It is guilt by association that is the reason why WRLD, a well-managed leader in a very fragmented market, is trading at an inexpensive 7 times trailing earnings.

Business Attributes:

WRLD has 441 offices in 10 states serving a current customer base of 380,000 individuals with the average loan size of about $650. The Company has two basic loan offerings: Large and Small. The large loan program (loans of $1,500 and up and maturing in two to three years) make up about 30% of the company’s loan mix. Small loans (generally under $500 and maturing in less than 6 to 9 months) account for the remaining 70% of loans. Annual percentage rates on loans, including interest, fees, and related credit insurance products, range from 40% to 200%, depending on loan size, maturity, and state regulations.

Management and Operations:

The CEO and CFO have each been with the Company for over 13 years and have spent the majority of their careers in the small loan business. Management and the board currently own over 15% of the shares outstanding so their motivation is aligned with that of the shareholders. During the past few years the CEO has, on an annual basis, sold about 1% of his holdings, but because of the size he is selling I am not too concerned. During their years of leadership they have created a company that consistently generates free cash flow and performs conservative accounting methods (no gains on sale or securitizations of loans). The Company employs an active stock buy back program because of the strong cash flow. To put the current and future cash flow in perspective, the Company could buy back every share at today’s price over the next 4 to 5 years. Loan loss provisions have increased year-over-year by about 20% because of the increase in personal bankruptcies; this is expected to decrease as the economy rebounds. The Company is already seeing signs of improvement in net charge-offs.

Growth Opportunities for the Company:

New Products:
WRLD’s 380,000 person customer base creates tremendous opportunities for new products. This year WRLD will prepare 40,000 tax filings for its customers; four years ago it did not even offer this product. The Company thinks it is realistic that they could double the number of filings in the next few years. Another new product addition has been large loans. So called large loans (typically about $1500 in size and 2 to 3 years in duration) have lower gross margins but lower maintenance costs as well and have contributed strongly to growth.

Consolidation:
Another area of growth for WRLD is consolidation of this very fragmented market. WRLD is the largest publicly traded company of its kind. It is in only 10 states and the majority of these states have not even been partially penetrated. WRLD would like to grow the top line revenue by at least 5-6% through new office openings or acquisitions. That number could easily increase. As one of the largest players with strong cash flow and a liquid currency (being publicly traded), WRLD is in a position to acquire independently owned consumer-finance companies that are accretive to the bottom line.

Penetration:
On a store per population basis, WRLD’s home state, South Carolina, has almost twice the penetration as the other states in which it does business. Those states include Georgia, Oklahoma, Louisiana, Tennessee, Texas, Illinois, Missouri, New Mexico, and Kentucky.

Potential Risks:

Economy and interest rates:
If the economy were to weaken significantly, the firm could be forced to raise their loan loss reserves. However, past recessions have only had a modest impact on growth and earnings. The typical client of WRLD is already experiencing tough times. The economy has not been shown to have a dramatic impact on the client’s ability to pay. The other risk would be a significant rise in interest rates (presumably due to a sharp economic rebound) . This would have an impact on the spread that WRLD earns. But given how wide WRLD’s gross spread is on an absolute basis, the impact on growth and earnings would not be dramatic.

Structural Increase in the Loan Loss Reserves:
The company has expressed concern over the increased credit opportunities being offered to its customers by more traditional lenders and credit card companies. This has led to a secular increase in the loan loss reserves the company has taken for the last several years. Given the recent carnage in the high risk consumer finance area generally (i.e. Providian) one would expect credit to this sector of the population to decrease, not increase, going forward. WRLD has navigated this recent difficult period with growing earnings. Thus I would expect that any decrease in the amount of credit offered to WRLD’s customer base would increase WRLD’s opportunities.

Asset Write Downs:
Given that WRLD has never had to restate earnings due to bad loan assumptions over the last 10 years and given the loan turnover averages about 8 months, the concern over a problem with past loans rearing its ugly head is not a significant concern.

Changes in the Legal Environment:
Currently WRLD does not operate in several southeastern states because the legal environment is not attractive. In some states (Florida and North Carolina), usury laws limit the amount which can be charged on loans. In others (Mississippi and Alabama), the tort risks outweigh the opportunities. Clearly, if the legal environment were to worsen in current states in which WRLD operates, the economic impact would be significant. However, the company has not, to date, had to ever leave a state due to legal changes. Plus, the risks are off-set by opportunities. If the legal environment were to improve in any of the currently closed states, the opportunities would be huge.


In summary, this is a straightforward company that has been time tested for over 10 years. It has had steady growth and is run by a well-managed leader in a highly fragmented business that will continue to consolidate the industry and continue to grow the top line by 12% and the bottom line by 14%. Over the next 6 months as the economy continues to recover and WRLD continues to increase revenue and earnings, this stock will not stay at 6.4 times forward looking earnings. It will trade more in line with its long-term earning growth of 14%.


Management will be having a conference call on April 23rd to discuss Fiscal 2002 year-end results.

Catalyst

1. Current Valuation and Growth: The Company is trading at a historically low valuation on an earnings and growth basis. WRLD is currently trading at 7.25 times trailing 12 months’ earnings and at 6.4 times forward-looking earnings. Earnings growth for fiscal year ending March 2001 was over 12%, and earnings growth for fiscal year March 2002 will be greater than 14%. With a ROE of over 20%, price/book value of 1.7, and top-line growth for fiscal 2002 over 11.5% WRLD is truly an undervalued opportunity. The Company will be opening at least 25 net new offices in fiscal 2003 and existing office revenue is expected to increase year-over-year by at least 8 to10% as it did in the previous years.
2. Economic Recovery: The Company was able to increase earnings by over 14% last year during a recession, reduce G&A as a percent of revenue, increase cash flow, and improve return on average assets. As the economy continues to recover, WRLD will be well positioned to take advantage of this economic turnaround because of growth opportunities and improving cash flow and loan loss ratios.