Alan Brochstein

Paired Trade: Buy EZCORP, Sell Aaron's Rents

Maybe they won't be left holding Herman, but the growth isn't sustainable if their customers can't meet the payments. No evidence yet, that's for sure. If one believes the numbers, then the stock isn't the devil I predict - who can argue with 13X 2010? They had a surge in the last recession followed by a quick pullback, but that wasn't a consumer recession. I think that there are going to be too many competitive sources out there - pawn shops, craigslist, etc.

I have some serious egg on my face on the EZPW side and a hole in my pocket too!

Free Cash Flow Isn't Always so Free

Interesting view that I appreciate your sharing. It was easier for me to be negative on it at 18 than it is at 6. Still, these aren't "normal times". The company must pay back or refinance a lot of debt over the coming years ($3.2 billion). In the past decade, the company has generated net income of about $2 per share on average. That's $120mm a year. If the capital markets aren't friendly, that's a lot of years of income to recapitalize! I don't know where the bonds trade, but they certainly deserve a look before buying the equity.


On Jul 06 08:44 PM fcharlie wrote:

> United Rentals is an interesting story. While you make good points
> as to their poor capital allocation, it is well reflected in the
> stock price. The current stock price assumes a high probability they
> don't survive. In any normal environment, they are capable of earning
> GAAP $1.75-$2.00 per share. So the question now becomes, can they
> survive, and if they can, is it so cheap that one can overlook their
> poor decisions of the past and buy it anyways....During normal times,
> URI needs to spend big money on new equipment. A huge cash drain.
> They are counter-cyclical with regards to cash flow. Today, while
> they still spend money on new equipment, they take in more cash by
> selling old equipment. They have huge depreciation expense, and they're
> not spending any of it right now. This will allow them to survive.
> You can basically buy this company at three times normal earnings.
> When normal earnings return, sell it as fast as you can. It's not
> a great company, but it's so cheap that it doesn't have to be.

Free Cash Flow Isn't Always so Free

Well said, Dan. I guess what I am trying to point out is not that FCF is a bad metric for good companies, just maybe a poor one for bad ones (serial acquirers, companies leveraging the balance sheet, companies with massive investments in categories beyond "inventory" or "capital equipment").

Free Cash Flow Isn't Always so Free

Follow up: I picked on RGS, which was on the Mid-Cap screen. This morning, the company announced an 11.5mm share offering plus a convertible deal (which is also dilutive).
Not too surprisingly, the company also pre-announced an acceleration in the decline in same-store-sales (-4%). I am guessing that the stock will no longer be up 17% YTD.

Free Cash Flow Isn't Always so Free

I like the way you summed it up. There are a lot of companies with tons of debt but no FCF. I wanted to warn that FCF isn't the source of salvation that some might think.


On Jul 05 05:18 PM skwestorange wrote:

> The take away is avoid companies whose debt is in the stratosphere?

Paired Trade: Buy EZCORP, Sell Aaron's Rents

Thanks for your comments. Yes, history would indicate, but these aren't exactly "normal" times. My thesis is that AAN's is getting some customers that might never have gone in there before, but they can't use credit cards like they have in the past.


On Jun 12 10:07 PM Bud H wrote:

> In weaker economies companies like Aaron's draw customers "down"
> from retail credit buying - they still have income, still have needs,
> but fear debt and obligation (not to mention liking free repairs).
> In strengthening economies customers who have overloaded or maxed
> out their credit come to Aaron's while newly employed consumers who've
> never had credit go to Aaron's with new paychecks. How can it go
> wrong? Collections? History of the industry proves that 94% of all
> customers pay their bills without much prodding and with no "gorilla"
> tactics on part of company. Real cost center is the delivery, pickup,
> refurbishment, repair, replacement and distribution of goods with
> higher salaries paid to those who do it because the job is three
> times more complex than traditional retail.

Paired Trade: Buy EZCORP, Sell Aaron's Rents

Surprising and very disappointing... I still think AAN is an accident waiting to happen - and much worse than the slack demand at EZPW.


On Jun 12 11:28 AM User 430417 wrote:

> Well EZPW is certainly tanking now. Reduced earmings estimates. AAN
> is really odd - since I've been watching it, it tends to do the opposite
> of the DJIA - this morning, after failing to participate in any market
> gains this week (indeed doing the opposite), it was up until the
> market turned north - now AAN is into negative territory. But I got
> out of EZPW with a $100 loss and am glad I did.

Paired Trade: Buy EZCORP, Sell Aaron's Rents

Don't be fooled by the operating cashflow - it's fake in my opinion. The company reinvests in new merchandise on an on-going basis. It's like Hertz. Yes, there is large depreciation, but the "profits" are all plowed into new cars there. It's not "CapEx" at AAN (or HTZ). In simple terms, at least the way I look at it, the business grows and profits grow but the risk grows too as the portfolio grows.

I see a lot of "screaming sells". Some of my favorites are PSS and HOT

20 'Babies with the Bathwater' Stocks for This Week

Perhaps the new environment we are in should lead you to question the validity of your model regarding "strong" fundamentals. Just a question, really, since I don't know how your model works to characterize that attribute. RNT shows up on your list, and I have done proprietary work on that one to suggest that it is an "aids and abetts" consumption of things by people who can't afford them. It would seem that while this worked and could produce "earnings stability" and "growth" in the past, one would have to be very skeptical that it would continue to work. Similarly, I know SRDX very well. I am not sure how you characterize their fundamentals, but their "growth" has been driven by a large deal with MRK that has now been cancelled. In the most recent quarter, though, there was a big boost (at least to GAAP earnings) due to that termination. Rather than debate the details of your model, suffice it to say that these are times when sticking to what has worked in the past is not likely to prove very helpful in my opinion. I have had to totally shift my focus (away from sustainable growth at a reasonable valuation combined with good technicals) to a deeper value strategy focused on only the very best balance sheets. In the past, I liked to buy good charts, now I have to sell them and instead focus on buying oversold stocks that have overreacted to near-term news.

13 Extremely Oversold Consumer Stocks

Thanks for your comments. The XLY, as described in a previous article that I wrote, has Studs, Duds and Dogs. Most of these are obviously the Dogs, though MW, which is the one I really like, is actually more of a Dud as it has just retraced a gain. I generally don't like Dogs, but, in October, sometimes things get overdone. Take advantage potentially of institutional selling that more than punishes the stock price. By the way, these aren't buy recommendations - just a heads-up to check it out, as I intend to do myself.