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EZCORP Inc. (EZPW) is now a financial services company in the making, a lot different from what was traditionally a pawnshop business that also provided payday loans. The results are attesting that the company is successfully leveraging its network of customers to expand its loan business. It's about time to start looking and valuing the business from that angle.

The stock over the last 2 years has declined by 40% while the broader market was up 40% during that time. This stock weakness, in my view, was due to the company being in this major transitional phase. Now with new geographies, businesses and channels that are outgrowing the decline in the traditional payday loans and gold businesses, the stock has room to go up to $22-25.

Opportunities like online loans or international penetration that were being overshadowed by the weakness in gold loans earlier have started to drive growth now. Revenues grew 7% in this fiscal but excluding gold scrapping, growth is even more impressive with total revenues up 15% and earnings assets up 21% (link). Its right time to evaluate the success of the company's transition towards a financial services business.

Diversification beyond the traditional pawnshop

Traditionally, pawnshops provide pawn loans and sell collateral forfeited merchandise from its pawn lending operations and used merchandise purchased from its customers at its pawn or other stores. The collateral can be of gold, precious jewelry or other items.

Somewhat market driven, EZCORP Inc. is now transitioning beyond that and offering short-term consumer loans, fee-based credit services and auto title loans on single payment or multiple payment terms. The company also has various strategic investments,

  1. 60% interests in Grupo Finmart, provider of payday loans in Mexico.
  2. 51% interest in TUYO, which operates 19 buy/sell stores in Mexico City.
  3. 100% interest in Cash Genie, which offers short-term consumer loans online in the United Kingdom.
  4. 30% of Albemarle & Bond Holdings, one of the U.K.'s largest pawnbrokers with over 230 stores.
  5. 33% of Cash Converters International Limited, which franchises and operates 700 buy/ sell used merchandise shops and also offers financial services.

New channels and products to drive growth from here

For the last few years, business has been rapidly changing with 40% of the loan balances attributed to loans other than pawn loans or payday loans. Yields on these businesses are lower than the pawn business but with the growth in assets, the net earnings for the total company should improve.

Revenues from consumer loan fees for the last 9 months have grown by 27% over the last year making up 24% of the total revenue from 19% last year, which was much faster than the overall revenue growth of 8%. Loan balances grew 22% with storefront loan balances up 19% and online stronger than that. The company can easily show 15-18% loan balances growth going forward with the new initiatives.

Online loans

The U.S. online loan book grew by 63% sequentially and 75% of the total online businesses are payday loans or installment products (link). The company currently provides online lending in 5 states, which may soon expand to 9 states. Currently, 40% of the online business is coming from EZCORP's existing customers.

The company has increased its marketing efforts to accelerate loan growth, and now expects this business to cross into profitability in the first half of fiscal 2014. The online channel has been well leveraged by its competitor Cash America International (CSH) with 40% of its revenue from online channel.

The online loan balances within U.K. grew 170% in this quarter. Cash Genie, the U.K. based online shot-term loan provider owned by EZCORP is profitable for the last 6 months and proving to be a great success. Loan balances have doubled from a year ago, net fee revenue increased 50% over the last year, and the company is now offering installment loans, broadening its product offerings. In most recent conference call CEO, Paul Rothamel had this to say,

"Cash Genie will flip from minor league accretive to earnings this year to being a positive material impact on earnings next year, and the US online business frankly is tracking on the same trajectory about nine months later which is about the time we made the purchase."

The online refinancing business may cause a temporary rise in operating expenses as the customer acquisition cost is higher but the online customer has a much higher retention rate than a store customer. Recently, the company also acquired Go Cash, an online lender with presence in multiple states.

The auto-title product is another promising product that is still at a nascent stage. The product is growing and maturing with a tiered pricing approach based on the quality of car and the quality of collateral. Even in a price competitive environment, management believes it can become a much bigger business on volume growth.

New more profitable geographies to drive store growth

Today 18% of the company's revenues are derived outside of the United States and almost 60% of the 2312 store that EZCORP and its affiliates have been out of the U.S (link). Most of the new store build are also out of the United States. So far this fiscal year, the company has already added 172 locations, out of which 93 are outside the United States.

Mexico is a promising growth and opportunity story for the company. The build out costs for the international stores are close to 50% of the costs in the U.S., while the profitability cross over time is just 60% of the U.S. for Mexico and 80% of the U.S. for Canada. Expected Return On Invested Capital (ROIC) for Mexico is at least 10% higher than the stores in the United States.

Compared to First Cash Financial Services (FCFS), which has a leading position in Mexico with 516 stores, the company still has ample room to grow to 235 stores.

Gold business at the bottom

Gold business has been weak compared to the last few years, when the company saw the growth from rising gold prices leading to customers cashing in by selling at the pawnshops. Gold contributed negative 8% to the total revenue growth of 5% in the last quarter.

At 4% of the total net revenues, jewelry scrapping business is trading close to the bottom level, down from 15-20% just 2 years ago. The negative earnings impact of the jewelry scrapping business alone was close to 10 cents in the recent quarter. Jewelry scrapping has declined big from earlier levels when the company was scrapping 70-80% of gold gram volume to current levels of 30-35%.

Direct purchases of gold declining by 33% and loan volume in gold grams declining by 17.6%, while the gold loan drops decreasing by 17.0% are all suggesting, there is limited downside to the company's gold pains.

As customers move from jewelry loan to general merchandise loans, it negatively affects the size of the loan and the jewelry scrapping business. Typically general merchandise loan is of 1/3 the size of the jewelry loan and company loses on the jewelry scrapping business as well.

Valuation

Relative to other major competitors, valuation level has room for multiple expansions.

Source: Yahoo Finance

Stock

P/E 2013

P/E 2014

EV/ EBITDA

P/Book

EZPW

$16.9

8.4

7.1

5.4

1.0

CSH

$45.3

10.7

9.1

5.4

1.3

FCFS

$57.9

20.5

16.7

12.7

4.6

Looking at the financial metrics of the company in isolation. Current margins are close to bottom levels as jewelry scrap margins have already more than halved over the last few years from 40% levels. Assuming a flat gold business, company has potential to grow earnings at 10-15% in near term.

Source SEC Filings and Yahoo Finance

Stock

$16.9

Market Cap ($M)

$914.0

P/ Book

1.0

P/ Expected 2013 Earnings

8.4

P/ Sales

1.3

P/ Expected 2014 Earnings

7.1

Rev growth FY 13

4%

EV/ EBITDA TTM.

5

Rev growth FY 14

6%

Net Debt/ share

$3

Operating Margins

11%

Conclusion

Maybe market driven but the fundamental business is changing into more of a financial services business, which overtime would help the bigger professionally managed companies compared to small independent stores. Company's portfolio of different assets, geographies and channels position it well. Target is $25.

Source: Right Time To Start Looking EZCORP As A Financial Services Company