Ezcorp (EZWP) and First Cash Financial (FCFS) both operate in the pawnshop and pay day lend industry. When comparing the financial performance of the two companies it becomes obvious that pawnshops perform well in tough economic times. It makes common sense that when the economy as a whole is not doing well that there is a greater demand for customers to sell valuables for quick cash, to use the pay day lending services and to be more open to buying secondhand goods.
|First Cash Financial||2007||2008||2009||2010||2011|
|Revenue Per Share||$12.64||$11.41||$12.27||$14.23||$17.33|
|Earnings Per Share||$1.06||-$0.74||$1.67||$1.90||$2.59|
|Net Profit Margin||8.4%||-6.5%||13.6%||13.4%||14.9%|
|Return on Equity||16.3%||-13.9%||23.4%||19.3%||24.7%|
|Revenue Per Share||$9.71||$11.89||$13.08||$15.85||$18.51|
|Earnings Per Share||$0.99||$1.36||$1.50||$2.10||$2.60|
|Net Profit Margin||10.2%||11.5%||11.5%||13.3%||14.1%|
|Return on Equity||17.5%||19.2%||16.5%||18.7%||18.4%|
Comparing the revenue growth between the two companies Ezcorp has out performed its peer by growing revenue at an average 17.5% a year between 2007 till 2011, compared with 8.2% from First Cash Financial over the same period.
Earnings per share growth for both companies have been very impressive over the comparison period, with Ezcorp growing on average marginally above that of First Cash Financial, 27.3% compared with 25%. It must also be noted that First Cash Financial had a bad year in 2008 and declared a full year loss, while Ezcorp has had a steady increase year over year in reported earnings.
As First cash Financial reported a loss in 2008 it obviously had a negative net profit margin for that year, but for the next three years maintained a high margin. While Ezcorp has been steadily improving its net profit margin year over year.
Since the year it reported a loss First Cash Financial has had a higher return on equity ratio. Though both companies have done well to maintain a high return on equity because both of their book values have been growing rapidly, and as book value grows earnings have to grow as fast, otherwise the return-on-equity ratio will decline.
The companies financially are similar, they both have been growing at a similar rate and the market capitalizations are very close ($1.5Billion vs $1.2Billion). Though I believe that Ezcorp has performed superior over the comparison period because steady growth is worth a premium, the much higher revenue growth and slightly higher earnings per share growth in my opinion justifies a higher valuation. It is surprising to find that the market is valuing First Cash Financial at a much higher price/book ratio of 4.1 compared with the Ezcorp ratio of 2.2. The most widely used tool to value a stock is the price earnings ratio. The price earnings ratio is also 31% higher for First Cash Financial equaling 16.3 compared with 12.5 for Ezcorp.
The situation appears that the market at the moment has undervalued Ezcorp, if an investor is concerned by the market as a whole he or she might consider hedging the long Ezcorp trade by going short First Cash Financial. I do not believe First Cash Financial is overvalued by the market but compared with Ezcorp it is overvalued and because the companies are so similar it makes a good hedge to give the market time to revalue Ezcorp.