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On Jun 25, 2013, we upgraded our recommendation on DFC Global Corp. to Neutral from Underperform given its continued efforts to grow its pawn lending business.  The company carries a Zacks Rank #3 (Hold).

Why Upgrade?

Apart from diversifying its product range, DFC Global has been expanding across geographies. It has also completed several acquisitions with the objective to expand and diversify from its core retail financial services business in Canada, UK and the U.S.

The acquisition of Suttons & Robertsons provided long-standing brands, proven expertise and another business model to expand the company into the high-end pawn-broking market, which has very little competition in UK. Similarly, DFC Global UK Ltd., a division of DFC Global, took over Sefina Finance AB.

The takeover seems to be a strategic fit for the company's business portfolio as it provides pawn loans through 16 store locations in Sweden and 12 stores in Finland.

In an effort to strengthen its foothold in the pawn broking business, DFC Global intended to buy 10 pawn broking stores in the United Kingdom for $6.4 million. These stores are located across northern and southern England, where ALICE (asset limited, income constrained, employed) and ARTI (asset rich, temporarily illiquid) population are high.

In Mar 2012, the company closed the acquisition of Super Efectivo, a pawn loan provider in Spain, to strengthen its position as a secured pawn lender in Europe. Further, in Jun 2013, the company forayed into Romania by acquiring Express Credit of Romania.

On the other side, DFC Global introduced a limit of 3 loan rollovers per customer leading to a credit crunch for customers carrying multiple loans. This led the company to face higher loan defaults in its UK business in the quarter, affecting the bottom line adversely.

In the third quarter of fiscal 2013, the company witnessed growth in both revenues and expenses. However, expense growth surpassed the improvement in revenues and led to a decline in operating income. Although DFC Global engaged in share buybacks, the negatives dwarfed the potential positive impact of lower share count on earnings.

Nevertheless, DFC Global expects operating earnings in the range of $1.70–$1.80 per share for fiscal 2013. The Zacks Consensus Estimate of $1.74 lies within the guidance but is down 19.6% on a year-over-year basis.

Other Stocks to Consider

Among other financial services providers, FleetCor Technologies, Inc. (FLT - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy) and Financial Engines, Inc. (FNGN - Snapshot Report) and SS&C Technologies Holdings, Inc. (SSNC - Snapshot Report) carrying a Zacks Rank #2 (Buy) are worth considering.

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