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On Apr 5, we downgraded our recommendation on DFC Global Corp. to Underperform from Neutral, following the announcement of a lowered fiscal 2013 guidance. The Zacks Rank #5 (Strong Sell) company expects to report lower fiscal third-quarter earnings compared with the year-ago level.

Why the downgrade?

Following the news release, DFC Global witnessed sharp downward estimate revisions. All 4 estimates for 2013 as well as for 2014 moved south. While the Zacks Consensus Estimate for 2013 slumped 29% to $1.71 over the last 7 days, the same for 2014 dropped 30% to $2.00 over the same period.

Cause for Concern

DFC Global trimmed the fiscal 2013 earnings expectation to $1.70 to $1.80 per share from $2.35 to $2.45 per share guided earlier. Additionally, in the prelim result, DFC Global revealed that it expects operating earnings between 20–24 cents for the third quarter of fiscal 2013.

Moreover, the third-quarter prelim result of DFC Global is substantially lower from 53 cents earned in the year-ago quarter. The Zacks Consensus Estimate is at 22 cents, representing a year-over-year decline of 59.4%.

Management also stated that 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, the company is facing more loan defaults in its UK business, which in turn weighs on the earnings. 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.

In addition, with increasing penetration of electronic banking services into the check cashing and money transfer industry, fees associated with check cashing has declined significantly over the years.

Also, DFC Global’s operating expenses have been increasing over the last few years, attributable to higher salaries and benefits, provision for loans losses, occupancy costs, and cost of gold purchased. The rise in expenses has restricted operating margin expansion.  If expenses continue to accelerate, operating margin expansion will be hugely affected going forward.

Financial Services Providers That Warrant a Look

Among other financial service companies, Euronet Worldwide Inc. (EEFT - Snapshot Report) , Moody's Corp. (MCO - Analyst Report) and SS&C Technologies Holdings, Inc. (SSNC - Snapshot Report) carry a favorable Zacks Rank #1 (Strong Buy) and appear impressive.

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