Value Trap at World Acceptance (WRLD)

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Jul 27, 2015
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First off, looking at World Acceptance’s (WRLD, Financial) website makes me cringe. I wonder why it hasn’t done a better job cleaning up its brand for the digital age. On the other hand, a look-through at the company’s financials and you see a business that doubled its sales and profit along with tripling its book value in the last decade. Doing this while maintaining a very high return on equity and very low loan net cap rates.

2005
Revenue: $236 million
Income: $39 million
Book: $11.48

2015
Revenue: $587 million
Income: $111 million
Book: $35.09

In fact, if you did a standard DCF analysis, the stock has a fair value over $300 per share. And, given the P/E and P/B are both under 10 year averages, the average investor may just blindly start buying. Price-to-earnings ratios can be tricky. They could signal a screaming bargain or the end of positive earnings.

StockTwits sentiment is 96% bullish right now.

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All signs, seemingly, of a great value stock at a buy price. That is, until you look deeper.

For one, the type of business World Acceptance runs (subprime installment loans) places it square in the crosshairs of government regulators –Â namely the Consumer Financial Protection Bureau (CFPB).

The agency has “taken action against payday lenders and installment lenders for unlawful lending and collections practices that include using false threats of lawsuits or criminal prosecution to collect debts, charging undisclosed fees to service members, and robo-signing court documents related to debt collection lawsuits.”

The CFPB has already moved against reputable brands like Discover Financial (DFS, Financial), American Express (AXP, Financial), and Capital One (COF, Financial) for how they sold credit insurance products and levied restitution payments totally more than $350 million on the companies. It could be just a matter of time before the CFPB does the same to WRLD. This is, in my opinion, why there is a 95% short interest in the stock and why the stock will continue trading a lot lower, maybe into the single digits.

Here’s an interesting timeline of events to help solidify the point.

September 2013: CFO Retired

November 2013: President & COO Retired

September 2014: WRLD auditor KPMG Resigned

Then, in May of this year, World announced that it was looking to place $250 million in senior notes. Just seven days later, the company withdrew the placement, and within two weeks of failing to place the notes, the CEO retired. Anyone see “The Smartest Guys in the Room?” I’m not saying that WRLD is a phony company like Enron became, just that you should…

Please avoid this stock at all costs.

It might look like a bargain on paper, but could burn your investment to the ground. Will it go to zero? No. None of these companies are worthless, but look at what happened to ITT Educational (ESI, Financial) last year. It was riding high at $40 a share until regulators started to crack down on that industry. Now the stock is below $5. I think you could easily see the same thing happen here.