FirstCash's Ratings Upgraded, Outlook Revised by Moody's

Moody’s Investors Service, the rating arm of Moody's Corporation MCO, recently upgraded the rating for FirstCash, Inc.'s FCFS senior unsecured debt and corporate family ratings to Ba1 from Ba2. The company’s rating outlook has been revised to ‘stable’ from ‘positive’.

Notably, the rating arm has withdrawn the company’s long-term corporate family and senior unsecured ratings outlooks due to its own business reasons.

Also, shares of FirstCash have gained 10.9% so far this year, underperforming 31.4% growth recorded by the industry.

Key Rating Drivers

Moody’s recent rating upgrade reflects FirstCash’s robust financial fundamentals. Further, the company’s strength in the net income to average managed assets ratio is likely to continue in the upcoming days. The metric stood at 5% in the second quarter of 2019.

FirstCash, a key player in the highly-fragmented pawn industry in the United States and Mexico, has robust foothold in the pawn lending and retail merchandise businesses. Notably, its tangible common equity to tangible managed assets was 21.7 % as of Jun 30, 2019, reflecting solid capital position. Moody’s expects this to continue over the next 12-18 months.

Moreover, FirstCash’s efforts to diversify geographically helped the company expand its operations in Latin America. Though such initiatives benefit creditors, there are risks related to economic volatility, geopolitical and technology associated with the company’s rapid growth in the Latin American market. However, such risks will likely be partially offset by the company’s initiatives to launch, acquire and integrate pawn stores. Further, decent leverage and strong profitability will provide support to some extent.

The recent revision in the company’s outlook is due to Moody’s expectation that FirstCash will manage its leverage conservatively. Further, Moody’s anticipates that the company’s tangible common equity/tangible managed assets will be more than 20%, and it will maintain its profitability in the upcoming period.

Nonetheless, social and governance risks faced by pawn lenders might act as deterrents for the company.

Currently, FirstCash carries a Zacks Rank #4 (Sell).

What Can Lead to a Rating Upgrade/ Downgrade?

The ratings might improve further given the company’s solid liquidity position, along with its strong tangible equity position and profitability.

However, the ratings might witness downgrade in case the company’s profitability declines and leverage increases, causing deterioration in interest coverage.

Key Picks

Enova International, Inc. ENVA has witnessed 10.3% upward earnings estimate revisions for 2019, in the past 30 days. Moreover, this Zacks #1 (Strong Buy) Ranked stock has rallied 9.6%, in the year-to-date period. You can see the complete list of today’s Zacks #1 Rank stocks here.

Navient Corporation’s NAVI ongoing-year earnings estimate moved 2.9% north in 30 days’ time. Additionally, the stock has surged 62.2%, so far this year. It sports a Zacks Rank #1, at present.

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