CARFINCO FINANCIAL GROUP $7.93 (Toronto symbol CFNI; TSINetwork Rating: Speculative) (1-888 -486-4356; www.carfinco.com; Shares outstanding: 24.6 million; Market cap: $195.1 million; Dividend yield: 5.3%) provides car loans to consumers who aren’t able to meet the criteria of traditional lenders, like banks.
Edmonton-based Carfinco started out by financing vehicle repairs in 1997. In 1999, it began providing loans for car and truck purchases. In January 2001, the company got out of the repair-financing business to focus solely on lending money to car buyers.
Carfinco converted from a conventional corporation to an income trust in 2004. It converted back to a corporation on January 1, 2012.
The company offers its loans through 1,459 car dealers across Canada. About 60% of its loan portfolio is in western Canada and 40% is in eastern Canada. The company recently entered the Quebec market.
Carfinco aims to review a customer’s credit and provide an approval or a rejection within 30 minutes. It does this using an online application system. The company evaluates over 6,500 credit applications a month. During 2011, it approved 52% of the applications it received. Of those, 22% received loans.
A decade of rapid sales growth
Carfinco’s revenue has grown quickly over the last few years. Revenue moved up from just $5.1 million in 2001 to $21.9 million in 2006. By 2011, the company’s revenue had jumped to $59.6 million. That figure could climb as high as $72 million this year, and $81 million next year.
Earnings have moved up as well, from just $0.02 a share in 2001 to $0.70 a share in 2011.
In the three months ended March 31, 2012, Carfinco’s revenue rose 24.1%, to $16.8 million from $13.5 million a year earlier. The company loaned a total of $32.4 million in the quarter, up 32.6% from $24.4 million.
Earnings rose 12.3%, to $4.6 million, or $0.19 a share. A year earlier, Carfinco earned $4.1 million, or $0.17 a share.
The company’s bad loan rates continue to fall. In the latest quarter, 2.5% of its loans were in delinquency for more than 31 days, down from 3.3% a year earlier. The company offsets bad loans by charging a high effective interest rate of about 29%. When you add administration fees, that rises as high as 33%.
Dividend is high—and rising
In September 2011, Carfinco raised its monthly dividend by 20%, to $0.03 from $0.025. It raised its dividend again with the April 2012 payment, by 16.7%, to $0.035. The stock now yields 5.3%. The company pays out around 42% of its cash flow as dividends.
Carfinco will need a steady or improving economy to maintain its growth. Rising unemployment would cut demand for loans and push up its delinquency rate.
However, the company’s well-established dealer network, its investments in Internet loan-approval technology and its experience in the higher-risk lending market should let it keep increasing its market share.
Carfinco’s stock trades at 9.3 times the company’s forecast 2012 earnings of $0.85 a share.
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