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On Sep 12, we downgraded DFC Global Corp. to Underperform from Neutral based on the company’s dismal fourth quarter and fiscal 2013 results.

Why the Downgrade?

Estimates for DFC Global witnessed sharp downward estimate revisions after reporting disappointing fiscal fourth quarter and 2013 results on Aug 22. The Zacks Consensus Estimate for fiscal 2014 slumped 46% to $1.12 per share over the last 30 days as all 4 estimates moved south. For fiscal 2015, 1 of 4 estimates was revised downward over the same time frame, sinking the Zacks Consensus Estimate by 28% to $1.66 per share.

DFC Global’s fourth quarter revenues lagged the Zacks Consensus Estimate by 21%, though inched up 0.9% year over year.

Earnings for the quarter lagged the year-ago figure of 58 cents per share by 15.5%. However, it surpassed the Zacks Consensus Estimate by 4.3%.

With the Zacks Consensus Estimates for both 2014 and 2015 going down, the company now has a Zacks Rank #5 (Strong Sell).

Cause for Concern

Due to new loan rollover limitations (three loan rollovers per customer), several outstanding short-term consumer loans in the United Kingdom became immediately due, resulting in a temporary ‘credit crunch’ for the customers. As a result, DCF Global is facing more loan defaults in its U.K. business, which in turn weighed on the earnings of the company.

In anticipation of the increasing number of loan defaults, DFC Global constricted the lending-underwriting norms, which again is weighing on loan growth in UK. With the transition to new loan rollover limitations continuing, management expects to maintain lower loan origination through the first half of fiscal 2014, to lower the risk of higher loan defaults during the period. This will eventually constrain growth.

Additionally, the company expects to incur expenses in the range of $10–$15 million to support ongoing regulatory related activities, including regulatory advisory costs, legal opinions and analysis, and audit and regulatory compliance costs, in fiscal 2014.

The company derives a significant portion of its revenues from fees associated with cashing payroll, government and personal checks. Its contribution to top line has been declining due to increasing penetration of electronic banking services into the check cashing and money transfer industry.

Moreover, DFC Global’s escalating expenses continue to take a toll on margin expansion.  

Stocks That Warrant a Look

While we advise to avoid DFC Global, financial service provider FleetCor Technologies, Inc. (FLT - Snapshot Report) with Zacks Rank #1 (Strong Buy), and SS&C Technologies Holdings, Inc. (SSNC - Snapshot Report) and Financial Engines, Inc. (FNGN - Snapshot Report) with Zacks Rank #2 (Buy), are worth considering.

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