EZCorp: Profiting from Tough Times

What business is likely to prosper when economic conditions get really bad?

Pawnshops. EZ CORP (EZPW) operates about 294 in the US and 38 in Mexico while also offering payday loans through 71 of its pawnshops and 477 EZMONEY store fronts.

As you would expect sales and earnings have been booming as the world suffers through the worst recession since the 1930’s. Here are their (split-adjusted) per share numbers as reported by Value Line:

Year	Sales	C/F	EPS	B/V	Avg. P/E	52-wk Range
2002	5.39	0.34	0.07	2.86	13.9x	0.40-1.70
2003	5.64	0.47	0.22	2.88	5.6x	0.90-3.00
2004	6.14	0.45	0.23	3.15	12.6x	2.20-5.20
2005	6.59	0.59	0.36	3.46	12.3x	3.10-7.40
2006	7.80	0.94	0.69	4.20	13.2x	4.90-17.10
2007	9.01	1.15	0.88	5.23	16.3x	10.10-17.60
2008	11.02	1.56	1.21	6.58	11.1x	10.00-19.30

Over the six years 2002-2008 all aspects of the business surged while the valuation has contracted. Zacks and Value Line both see earnings of around $1.40 for this year and $1.64 - $1.70 for 2010. That makes the multiple just 8.5x the 2009 estimate and about 7.3x next year’s expectations.

The only other time EZCORP was available for a single-digit P/E was in 2003. Buyers of EZPW shares back then saw their shares rocket from $0.90 to $5.20 in one year, on their way to peaking at $17.10 by late 2006.

The balance sheet is solid with treasury cash exceeding total debt. Value Line gives EZCORP a ‘B++’ for financial strength (a very high mark from them for a small-cap issue). They also rank EZPW in the 80th percentile for stock ‘price growth persistence’ (with 100th being best).

A bounce back to even a historically low 11 times earnings would see EZCORP shares back at $15.40 by year-end 2009 and about $18 or better by the end of 2010.

Are those crazy targets? Not at all. EZCORP shares have actually traded at $17 and higher in each calendar year 2006-2007-2008 and 2009 to date. With all fundamentals growing nicely my goal prices may end up looking way too conservative.

I’m a buyer of the shares and a seller of puts right now. Here are the put premiums and their respective break-even points for those who might like to gain exposure at even lower than today’s quote.

	Net Break-Even Price
Sell March $10.00 Puts @ $0.65 /share	$9.35 /share
Sell March $12.50 Puts @ $1.90/share	$10.60 /share
Sell March $15.00 Puts @ $3.60 /share	$11.40 /share

EZCORP is a proven growth company with macro-economic tailwinds. How many companies can you think of that continue to show wonderful growth in the current economy, yet still trade at a single-digit P/E?

EZCORP shares could easily post 30% - 50% gains over the next 12 – 18 months.

Disclosure: Author is long EZPW shares and short EZPW puts.

Comments

[elipsemaster:]

The largest disadvantage I see to this stock is management owns only 2% and seems to be dumping what they have.

Aug 17 08:52 PM

[User241885/...:]

Thanks for a terrific analysis on a unique company. Briefly, to comment on the comment above, there has been much in the press recently about corporate insider selling, which as a trend is worrisome to be sure. Not to take away from elipsemaster's point, but it is important to remember that there are numerous reasons why insiders sell. Under the SEC Form 4, any transfer reported, and that could be to a trust, for estate planning purposes, to exchange as consideration for more options, is typically reported by the press as a sale. There should be more clarification.

Some companies also have fairly restrictive policies regarding windows for insider sellng, when they allow their insiders to sell and the black out periods when they cannot sell can be quite extensive. If you work at a place that has a 30 day black out period ahead of each quarterly report, an insider would have at least 120 days a year where he or she is precluded from selling, and that does not include blackout periods before a material annoucement like stock offerings, mergers and acquisitions.

The point is that making a generalization about insiders selling stock is not as probabative as one about insiders buying stock. There is, after all, only one reason why insiders buy.

Finally, while I do not know the exact specifics of EZ-Corp's executive compensation through option grants and stock awards, I do know that the company has been around for a while and as such management ownership does not tend to be as high as when the firm is a nascent public company. The company has had several offerings over the last ten years which in the aggregate tends to decrease management holdings from the early high levels.


I do not own EZPW but this article has definitely piqued my interest and makes me want to research it more, as has the comment above.

FAMCO

Aug 18 09:39 AM

[Paul Price:]

A Promising Stock Overlooked by Wall Street - Smart Money

Tomorrow's business headlines won't be dominated by the company listed below. It's too small, and their shares are covered by few analysts, vs. a median of 15 for the mostly large companies in the S&P 500 index.

Despite the limited attention, or perhaps because of it, this company boasts attributes lacking in many big companies today. It's highly profitable and sales are up nicely compared with a year ago. The company is financially strong, with little debt and it's attractively priced relative to their sales and profits.

EZCorp -

Projected 2009 Sales Growth: 29.6%
Return on Invested Capital: 18.6%

Austin, Texas-based EZCorp (EZPW: 14.29, +0.72, +5.30%) lends money to customers who aren't creditworthy enough to go elsewhere.

It operates pawn shops, where customers put up items of value as collateral, and where shoppers buy items that borrowers don't return for. It also operates payday loan stores, where customers can get expensive advances on their paychecks. Demand for both types of loans is up, but the payday lending business faces constant threats by federal lawmakers to reign in "predatory" fees, which can sometimes top 500% when calculated as an annual rate. (Defenders of payday loans argue that bounced check fees at banks can top 1000% when calculated as an annual rate against small account balances.)

Shares of EZCorp have multiplied sixfold in value in five years, yet they still sell for less than 10 times forecast 2009 earnings.

Regulatory risk might be more than priced into the stock. EZCorp has expanded aggressively into Mexico in recent years, where regulators are less strict. Also, according to analysis by Henry Coffey, who covers the shares for investment bank Sterne Agee with a "Buy" recommendation, EZCorp is worth its current stock price based on its pawn business alone.

Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."

Oct 06 06:47 PM

[Paul Price:]

UPDATE 1-Ezcorp Q4 beats Street; outlook above estimates

* Sees FY ‘10 EPS of $1.65-$1.69 vs est $1.64

* Sees Q1 ‘10 EPS of $0.41-$0.43

* Q4 EPS $0.42 vs est $0.41

* Revenue up 34 pct

Nov 5 (Reuters) - Pawn and payday lender Ezcorp Inc (EZPW.O) posted fourth-quarter profit that edged past market estimates by a penny as it gained from increased sales of jewelry scrapping and pawn service charges, and it forecast 2010 earnings above Street expectations.

Net income was $20.9 million, or 42 cents a share, compared with $16 million, or 37 cents a share, last year.

Jewelry scrapping sales increased 48 percent to $40 million, while pawn service charges rose 39 percent to $37.2 million.

Total revenue increased 34 percent to $164.8 million.

Analysts expected the company to earn 41 cents a share in the quarter.

Operational expenses grew 31 percent to $54.3 million.

U.S. pawn lenders are seeing a boost in revenue from their pawn operations as more consumers pawn gold for access to quick and easy cash due to higher gold prices. [ID:nBNG340597]

The company also said it expects to earn at least $1.65 a share in 2010 and at least 41 cents a share for the fourth quarter. Both the figures came above analysts’ estimates by a penny each.

“In fiscal 2010, we plan to open 40 to 50 Empeno Facil pawn locations in Mexico, 35 to 45 Cash-Max payday loan locations in Canada, and six pawnshops in the United States,” the company said.

EZPW shares are now trading at $14.30.

Nov 06 01:35 PM