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Still Neutral on DFC Global

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We retain our Neutral recommendation on DFC Global Corp. , following its third quarter results. DFC Global’s fiscal first-quarter 2013 earnings lagged the Zacks Consensus Estimate as well as the year-ago earnings due to a substantial increase in operating expenses, which managed to offset revenue growth.

DFC Global has been diversifying in both the sectors of products and geography for years. It has completed several acquisitions consistent with its objective to expand upon and diversify from its core retail financial services business in Canada, UK and the U.S. Its latest acquisition is 10 pawnbroking stores in the United Kingdom for $6.4 million.  Also, during the quarter, it opened 23 new de novo stores in U.K., Canada, Spain and Poland to widen its store base.

In an effort to solidify its footprint in the pawnbroking business, DFC Global will buy 10 pawnbroking stores in the United Kingdom for $6.4 million. The purchase is anticipated to be immediately accretive to its earnings. These stores are located where ALICE and ARTI population is high, across northern and southern England.

The company also scores strongly with the credit rating agencies.

On the flip side, the company’s revenues from fees associated with check cashing have been declining steadily, which further dipped by 11.8 million in the fiscal first quarter. This is a matter of concern as it is an important contributor to the company’s total revenue.

Also, the company’s debt-to-capital ratio is higher than both its peers, Cash America International Inc. (CSH) and SS&C Technologies Holdings Inc. (SSNC - Free Report) . Its interest coverage ratio is also lower than that of its industry average and some of its nearest peers.

The Zacks Consensus Estimates for the second quarter of fiscal 2012 and 2013 is currently pegged at 54 cents and $2.45 per share respectively. It represents a year-over-year increase of 5.3% and 13.5% for the respective periods.

DFC Global carries a Zacks #3 Rank, translating into a short-term Hold rating. SS&C Technologies Holdings, Inc. (SSNC - Free Report) , which closely competes with DFC Global, carries a Zacks #1 Rank, translating to a short-term Strong Buy rating.

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