EZCORP (EZPW) is in the business of pawn shops and payday loans, or quote their own press release, “EZCORP is primarily a lender or provider of credit services to individuals who do not have cash resources or access to credit to meet their short-term cash needs”. Even when the credit markets haven’t seized up, access to short term credit has always been limited. So companies like EZCORP, First Cash Financial Services (FCFS), Advance America (AEA), Cash America (CSH), QC Holdings (QCCO), and Dollar Financial Corporation (DLLR) fill that void.
Now, however, with hundreds of thousands of people out of work, the demand for short-term credit via pawnshops is booming. EZCORP knows this. It's been buying pawn chains around the country and is looking to add more. And in an environment where cash flow and credit is king, EZCORP is in the catbird seat. The company had over $65 million in operating cash flow last year, and $145 million in cash and investments on its books, and only $30 million in debt. The business, simply put, is on fire.
EZCORP is also heeding the call to Mexico. After First Cash dipped its toe down south, EZ has followed suit. Now both are aggressively expanding their operations there, particularly pawnshops. Much of EZ’s payday loan operations are located in Texas, which operates under an unregulated statute and has a friendly set of legislators. Not even the overblown threat of a federal rate cap of 36% APR on loans will reach that far, so their regulatory exposure is minimal.
It has also had the prescience to do auto title loans out of a few locations it purchased in Utah. The state is also friendly towards unsecured loans as it does not carry a usury cap, and auto titles (like pawn) have collateral behind each loan. The great thing about both pawn and auto title is that the LTV ratio is extremely low, so EZ lends out a small fraction of what the item is worth while collecting interest at a rate of 20% per month. If the customer defaults on the loan, the company will turn around and sell the loan for what it’s worth or, if it's gold, it’ll scrap it and sell it for close the spot gold prices (which is now close to $1000/oz.). The company wins no matter what happens, and that’s a business I like.
The company will grow earnings at a 23-25% rate this year, so why is the stock trading at a p/e of 8 on this year’s earnings? That’s the irrationality of this market. There are plenty of outstanding companies trading at ridiculous discounts. That doesn’t mean the stock will go up from here. It may. In a bull market, one would expect it to. However, in a bear market, anything can happen.
My strategy with EZ has been to buy whenever it falls below $12.50, turn around and sell half the position against covered calls one month out. When sold near the strike, I yield anywhere from 6 – 8% return after commissions. If it doesn’t get called away, I sell it again. If it does, I just wait for the price to return to my point and do it again. In the process, I’ve been able to amass a stock I like at attractive prices and decrease its effective basis using the premiums from the covered call sales. Plus, I get visionary management.
With the economy in crisis, this feels like a good bet to me. Perhaps you disagree. Let me know why with comments below, or send me a note.
Full Disclosure: Long EZCORP, no outstanding covered call positions, no position in any of the other stocks mentioned.