Here's why Cash Converters International Ltd has dropped 4% today

Cash Converters International Ltd's (ASX: CCV) profit has fallen hard. But was it expected?

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What: Shares in Cash Converters International Ltd (ASX: CCV) have taken a beating by the market today, following the release of its annual report.

The payday loans provider and second-hand goods dealer reported a 21.6% revenue increase but net profit fell 35.7% to just $21.13 million, year-on-year. Earnings per share (EPS) dropped to just 5.67 cents compared to 8.09 cents last year. The final dividend declared was two cents. Taking the total fully franked payout to four cents per share.

So what: Following last year's legislative changes to fees charged on micro-loans, coupled with a "rate cap", Cash Converters' Australian businesses appear to have failed to rebound as quickly as some investors were expecting. This is evident from the 4% drop in its share price.

However, as a happy shareholder, I can say there were a number of pleasing results in today's announcement which bode well for the long term. For example, between the first half and second half of FY14, revenue, EBITDA, NPAT and EPS all increased strongly. Earnings per share jumped to 3.35 cents from 2.32 cents six months earlier.

This was a result of significant increases for Cash Advances and Personal Loans experienced in the second half. The recently acquired 80% interest in Green Light Auto (which trades as "Carboodle") has also resulted in a growth in active leases, forward contracted lease payments, and revenue which went from $5.5 million in FY13 to $8.7 million in FY14.

The corporate stores and online personal loan and cash advance offerings in Australia continue to grow very quickly.

Now what: Today's results were hindered by management's decision to run down the UK loan book while they await a result from the UK's Financial Conduct Authority's (FCA) rate cap review. This could place hurdles in front of management in the future, however they have made the decision to feel the pain now (by holding back on outgoing loans) instead of waiting for the possibility of a negative outcome. In addition the UK division offers only a small contribution to group earnings.

Buy, hold or sell?

Yesterday I compared Money3 Corporation Ltd (ASX: MNY) to Cash Converters and judging by the market's reactions to both sets of financials, it seems Money3 is clearly winning the micro-loans race. However, I believe Cash Converters has a lot to offer investors. It maintains healthy balance sheets and pays a decent dividend to keep long-term investors happy, while its share price fluctuates in the short term. I continue to believe it's a good long-term buy and hold.

Motley Fool Contributor Owen Raszkiewicz shares in Cash Converters International Ltd. 

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