EZCorp (NASDAQ:EZPW) operates pawnshops in the U.S. and Mexico as well as consumer loan stores in the U.S. and Canada. The company also has strategic relationships with one of the UK’s largest pawnbrokers, Albemarle & Bond Holdings, and Cash Converters International, which has franchises around the world.
Morningstar classifies EZCorp as a consumer cyclical but an argument could be made that it’s technically anti-cyclical. According to their website, EZCorp’s objective is to be “the preferred providers of short-term cash to the cash and credit-constrained consumer – neighborhood by neighborhood.” You might know a few of these consumers? …or a few hundred! Sufficed to say, business is booming.
Earnings per share have grown 30% annually over the last 3 years with the top line not far behind at 25%. Free cash flow is positive and rising with a FCF yield around 7%. The company carries no debt, generates an impressive return on equity of 19.8 and boasts a solid net margin of 12.9, which has been rising year after year.
In March 2011, Ezcorp announced it was working with Rev Worldwide, which is developing prepaid debit card programs for under-served markets around the world. The alliance will see the two companies developing and testing a series of product innovations and expect to launch new products and service later this year in EZCorp stores around the U.S. I see this as an exciting development that potentially offers EZCorp an entry into the growthy realms of mobile payments and microlending.
The immediate concern for most potential investors is going to be the industry risk, specifically the quality (or lack thereof) of the loans made. Pawn loans of course require collateral; forfeited collateral is sold and reflected in revenues. The other two categories of loans, signature and auto title, are typically arranged through unaffiliated third-party lenders and though EZCorp bears the default risk, the fees generated in 2010 (per the company’s Q1 2011 quarterly report) were about 4 times greater than the bad debt written off. My impression is that you’ll find more risk on the books of Citi and Bank of America than on EZCorp's.
Technically, EZCorp remains vulnerable in the near term after registering a 52-week high and selling off on high volume. Though it has subsequently closed under the 50-day moving average several times, I view further weakness as a buying opportunity. This growth stock goes for a trailing P/E of 14.5, which equates to a PEG ratio of .5. As a GARP investor, this is exactly the kind of ‘growth at a reasonable price’ I’m looking for. Assuming analysts are correct that EZCorp can grow its earnings at a 17% rate (which may be on the conservative side) over the next five years, the stock could double over that time to the high $60s. It’s also worth noting that the stock has a relatively low beta at .82 and so far has delivered investors a fairly smooth ride.
Disclosure: I am long EZPW.
Disclosure: I am long EZPW.