There are literally thousands of companies that have been built on how people behave. Most of the time, these companies exist to serve people's demands for something convenient, necessary or entertaining.
But some companies exist because everyone is prone to mistakes. These are the kinds of investments Peter Lynch always sought out, because they are seen as being somehow distasteful. One such "distasteful" investment is in household budgeting. Most people just plain stink at it. If they aren't prepared when disaster strikes, they need a helping hand.
That's where World Acceptance Corporation (Nasdaq: WRLD) comes in. The company has been around for more than 40 years and is one of the last remaining companies to offer unsecured installment loans. Some may remember companies like Beneficial or AVCO, which provided unsecured personal credit lines. All those companies got eaten up by larger financial entities, leaving players like World Acceptance to stay the course. It's done so in a very profitable manner.
World's success isn't just based on the fact that people fail to make ends meet -- poor budgeting gets them into World's offices. But what keeps them there are three great aspects to World's loan structures.
First, World offers loans that are large enough to make a difference. Unlike the payday lender, which offers loans of around $500 for a period of two weeks, installment loans last an average of nine months at World (although the term is usually twelve months), and the average principal is about a thousand bucks.
Second, World uses the "Rule of 78s" when calculating a borrower's payment. Under this model, the customer makes the same size payment each month, but the interest is front-loaded. For a 12 month loan, 12/78ths of the finance charge is assessed as the first month's portion of the finance charge, 11/78ths of the finance charge is assessed at the second month and so on until the 12th month, when 1/78ths of the finance charge is assessed.
This is important because it plays into the third great aspect of World's business -- frequent refinancing. More than 70% of World's customers refinance their loan in the first few months. So if a customer refinances after three months, World has collected 33/78ths (42%) of the interest on the original twelve-month loan and issues a new loan again with front-loaded interest.
World Acceptance has been aggresively expanding during the past few years, almost doubling the store count (from 579 to 949) and receivables portfolio (from $352 million to $770 million) since 2005. Management has been extremely cautious about opening stores in states that aren't friendly to the business from a regulatory standpoint, so it has faced very few legislative battles (and because payday lenders get all the attention). The company has also dipped its toe into Mexico and plans to open 15 offices there in 2011.
Management has deployed capital wisely and enjoys superior credit terms with its backers. The company has drawn down $99 million of a $238 million credit facility at a mere 4.25%. Considering it then turns around and lends this money to customers at APR's exceeding 100%, it's no wonder the company has pumped out $450 million in free cash flow during the past three years. World has also bought back $150 million of its own stock during the past 10 years. In fact, when the stock hit a speed bump in April and May, one insider scooped up more than 360,000 shares.
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