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In an effort to expand in Texas, First Cash Financial Services Inc. (FCFS - Snapshot Report) announced the acquisition of the ‘Valu + Pawn’ brand for an all-cash payment of $70 million. Most of the deal value will be funded through the company’s revolving credit facility.

First Cash primarily deals in lending secured money to small customers against pawns or pledged personal property in the form of jewelry, electronics, tools and other merchandise. Including the 19 stores acquired from this brand, First Cash now owns stores in over 866 locations in 12 states of the U.S. and 24 states of Mexico. The company’s store locations have grown about 17% since Jun 2012.

The acquisition is expected to enhance First Cash’s market position in the rapidly growing pawn markets of Houston, Dallas and Fort Worth areas of Texas. Valu + Pawn brand also enjoys high profitability in its areas of operations, which is reflected by its significantly escalated pawn receivable balances and operating cash flows. Subsequently, the deal will likely be accretive to earnings from 2014.

Market Reacts to Low Guidance

Despite the valued acquisition, the shares of First Cash toppled about 10% to close at $49.71 in the after-hours trading session yesterday. Additionally, the stock plummeted one notch to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold) on Jun 25.

The market reaction primarily reflects First Cash’s announcement of a trimmed growth outlook for 2013 based on fluctuations in gold prices and the Mexican peso, the commodities that are a significant part of the collateral base. Consequently, the company reduced its earnings per share expectation within $2.75–2.90 for full-year 2013, from the prior range at the lower end of $3.10–3.24. The prior band represented growth of 14–19%, which is now now down to 1–7%.

Additionally, First Cash projects earnings of 56–59 cents per share in the second quarter of 2013. This excludes 4 cents per share related to one-time acquisition expenses, including which earnings should be within 52–55 cents a share. The company is scheduled to release its second quarter 2013 financial results before the bell on Jul 17, 2013.

While the lending against gold as collateral contributes about 15% to First Cash’s total collateral base, management remains optimistic of the long-term opportunities in the pawn industry, which has survived several economic fluctuations with resilience. Despite the expected economic volatility in the upcoming quarters, we believe that the company’s core pawn lending and retail operations have growth potential in the long run.

Other Stocks to Consider

While we prefer to avoid First Cash until further signs of improvement, other outperformers including Cabela’s Inc. (CAB - Analyst Report), Tractor Supply Co. (TSCO - Analyst Report) and KAR Auction Services Inc. (KAR - Snapshot Report) are worth a look. All three stocks carry a Zacks Rank #2 (Buy).

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