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Stock to Watch: DFC Global poised to cash in on payday lending

The Money Mart location on Yonge St. in Toronto, Ont. March 16/2011. (Photo by Kevin Van Paassen/The Globe and Mail)

Kevin Van Paassen/The Globe and Mail

DFC Global Corp.

Monday's close: $19.21 (U.S.)

52-week trading range: $15.06 - $20.50 a share

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Annual dividend: none

Analysts' ratings: There were nine buys and one hold, according to Bloomberg data. Target prices ranged from $19 a share from Daniel Furtado of Jefferies & Co. Inc. to $27 a share from William Armstrong from CL King & Associates.

Recent history: Shares of the U.S.-based payday lender and pawn broker have lost 3 per cent over the past year. Formerly known as Dollar Financial Corp., it also owns brands like Money Mart and Insta-Chèques in Canada. Because many U.S. states now have laws capping fees charged on short-term loans, the firm has been diversifying its business to Britain and Europe. DFC's stock has struggled because of concerns about tougher regulations on payday lenders in Britain where it has gained market share. The company, which has a store-based and Internet business, last week reported a second quarter that beat analysts' expectations, but tightened guidance for fiscal 2013 to $2.35 and $2.45 a share from $2.35 to $2.55 a share.

Manager Insight: DFC Global has a very conservative management team that would rather "under-promise and over-deliver" because of the difficulty in projecting earnings in Britain and Europe, and previously in North America, said Randy Kelly, chief executive officer of Montreal-based Formula Growth Ltd., which owns the stock. "I am not concerned, and neither is the Street because the stock is up [since last Thursday's earnings release]...I think the company will continue to beat, and over-deliver on earnings."

The sector "has been a space that Wall Street doesn't want to pay up for" until it sees strong numbers every quarter, he said. "The poster child has been First Cash Financial Services [whose stock has climbed 30 per cent over the past year on its strong Mexican business]."

Tougher rules in Britain, including a restriction on the number of times a payday lender can can "ping" a borrower's bank account for overdue payments, is expected to weed out smaller players, and help increase DFC's business, Mr. Kelly said. "We know the rules are working in their favour, and will only be good as the year progresses...The company is making acquisitions, and broadening their base in continental Europe...We think that they are going to be firing on all cylinders."

DFC's stock is cheap versus its peers at 8 times 2013 earnings, and could climb to the $26- to $27-range as it closes the valuation gap, while the company continues to buy back its shares, he suggested. "This business should be worth 10 to 12 times earnings...There could be lots of legs beyond a short move in the stock. It could be a multi-year play."

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