Fringe banking and Cash America International (CSH) | Fundamental Analysis

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Fringe banking and Cash America International (CSH)

Fringe banking centers seem to be continuing to take over strip malls all over America. These location offer small short term loans in a variety of formats for usurious interest rates. These "fringe banking" centers are more commonly known as check cashing, pawn, payday loan and cash advance shops, they are usually small and offer a narrow but easy to understand product line. In many ways they act like banks providing access to capital, lending facilities and a physical location but they are obviously different in many ways. Some of those differences may be a good thing for investors looking for a way to invest defensively when the credit market is tight and there appears to be no end in sight for distressed economy stretched by mortgage failures, oil price shocks, falling employment and plummeting home values.

I will admit that the business models employed by these businesses are distasteful for some investors, but as sources of emergency capital a loan from a fringe bank may be preferable to late fees or non-payment problems. Like most financial products the real problems for consumers emerge with overuse and abuse of the credit offered by these companies. Fringe banking facilities are alternatives that will be more attractive to more people when the economy is in decline, need for emergency funding is on the rise, and credit liquidity is tight. That all sounds very much like what is going on today.

Within the fringe banking sector I have liked Cash America International (CSH) and they still look good today for the same reasons. From a fundamental perspective they have performed well above their sector's average and TTM growth rates are 22%; compare that to the S&P 500 average of 13% over the same period. In a capital intensive industry thier ROE is equal to the S&P average but way above their industry sector, which indicates effective use of assets and a likelihood for continued profitability. I believe that fundamental strength in this industry is particularly important because these stocks are not immune to the financing problem plaguing the financial industry at large. The better managed firms are much less likely to be disrupted by the larger economic issues facing the industry.

We may not like the fact that there is in increased need for emergency financing in the US but as long as that demand continues to rise this should be a very defensive play during a period of uncertainty. This stock may make a sensible addition to a well diversified portfolio in order to take advantage of the volatility within the consumer market.

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