Elias Tsepouridis'  Instablog

As I continue to hold EZPW in my portfolio with positive alpha, I want to set a price target for the stock to help me identify when the position should be closed.  Using the value scorecard as a start, I use a discounted cash flow (DCF) analysis with sensitivity charts to help set my price target.

For EZPW, I have calculated a price target of $16.91 per share.  Some of the major assumption to get to this price per share are a 5% free cash flow growth rate over the next five years with a 0%  terminal value.  The cash flows are discounted with a WACC of 7.7%

To see my full set of assumptions and resulting analysis, see the document below:

After reviewing the recent Advance Auto Parts (AAP)  financial results that were released on November 11th, I was impressed by the same store sales growth of 4.7% that AAP was able to capture within this economy.  With a quick scan, AAP competes in many aspects of my value scorecard and I will continue to evaluate this firm as a potential purchase of some common shares for my next investment.

In addition to the value scorecard, I reviewed the other competitors in this industry to see what other value plays are out there, including AutoZone Inc. (AZO) and O'ReillyAutomotive, Inc (ORLY).  The one metric that seems to show some variation in this competitive set is the cash conversion cycle. If you are not familar with the cash conversion cycle, here is the definition (per wikipedia):

As my portfolio is 100% cash from the recent trade of the BARE Covered Call, I was on the hunt for the next investment.  I was able to uncover this next hidden gem by running my value scorecard screen, to find out this stock passes the majority of my value stock metrics.

EZCORP Inc. (EZPW) acquires, establishes, and operates pawnshops and credit services shops. These shops function as sources of consumer credit and as value-oriented specialty retailers, primarily selling previously owned merchandise. The company makes non-recourse loans secured by pledges of tangible personal property, and imposes a pawn service charge as compensation. This charge is calculated on the dollar amount and duration of the loan. The company operates more than 280 pawnshops and 334 payday loan stores.

Here is my completed scorecard:

In bowling it is called a turkey, that is right I have beat the S&P 500 3 times in a row through my trades.  The most recent strike that I bowled was the Covered Call trade on Bare Escentuals, initiated back on Sept 23rd, 2009.

The October 16th expiration date has come and passed on this strategy with BARE closing at $13.28, well above the $12.50 call option price that I sold.  So if you are not familiar with option trading, the underlying option that I sold was exercised and I sold my position at $12.50 less commissions.  I know it seems crazy that I sold for $12.50 when the stock closed over 0.75 higher but that is risk you take when you enter into a covered call (limits your upside for the premium)

Trade Summary (includes commissions):

On my way of finding the next equity to invest in for my portfolio, it was very difficult to find any candidates that meet many of my value requirements for a long term investment.  But with the screening and initial analysis that I completed, I was able to come across a great small to mid cap company that has excellent free cash flow (FCF).

Bare Escentuals, Inc. (BARE) is a company with a market cap of just over $1 Billion and trades on the Nasdaq.  While completing my value scorecard (see below), this company (like many others) have seen a decrease in sales and income due to the recession.  What really stands out in this scorecard is the FCF of $79.3MM in the last twelve months, representing a FCF Yield of 12.1%.  Adjusting for the recent stock appreciation, the FCF yield is 7.5%, well within the 2 times range of the 10 year T-Bill.

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