Nate C

EZCORP: It's Easy to Own This Stock

I am not a fan of payday lenders. Sure it sounds great--legalized usury must mean big profits, right? Not necessarily. I have been following other payday lenders like AEA (Advance Cash America). The fundamentals surrounding the business are not as rosy as you might think. The reason they have to charge such egregious interest is because of high default rates on the loans. Look at EZPW and AEA's profit margins--only around 10%. Not great when compared to other industries. Another problem with these companies is the intense competition between them for the same customers--they have no economic moat, they can only compete on the rates of interest they charge.

Another problem with these companies is that a recession will likely cause a spike in the loan default rate. EZPW is a little more shielded from this through their pawn shop business. Overall I would pass on these stocks. Also watch out for increasing legal problems surrounding the industry—AEA was forced out of Virginia and Pennsylvania by the state legislatures which passed laws that capped the amount of interest these companies can charge.