Dollar Tree and EZCorp: 2 Stocks for a Slow Economy

Includes: DLTR, EZPW
by: Cabot

By Roy Ward

The economy’s woes have grabbed more than a few headlines lately. The economy has officially slowed in the U.S., Japan, the U.K. and elsewhere. The U.S. economy, as measured by the Gross Domestic Product (GDP), rose 1.8% during the first quarter of 2011, its seventh quarterly increase in a row. The growth of the economy is slow by most standards, and I believe unemployment won’t fall until GDP increases by 3.5% or more.

I expect the U.S. economy to remain sluggish for an extended period of time, probably two years or more. Am I bearish on the stock market? Not at all. In fact, many stocks could perform very well while the economy dawdles along.

Most big companies derive a lot of their sales from foreign countries. Many countries around the world reported rapid GDP growth for the first quarter of 2011. China grew at a 9.7% pace during the first quarter, India 7.8%, Indonesia 6.5% and Mexico 4.8%. Companies with large overseas operations will continue to provide solid growth in 2011 and 2012.

Other stock sectors that provide opportunities when the U.S. economy is suffering include discount retailers, pawn shops and payday lenders.

Several companies should perform quite well during the next few months, even though I expect the stock market to trend somewhat lower. Dollar Tree (NASDAQ:DLTR) and EZCORP (NASDAQ:EZPW) are among my favorites.

Dollar Tree operates 4,177 general merchandise stores in 48 states and four Canadian provinces, many of which offer all items at $1. Dollar Tree sells house wares, toys, food, health and beauty aids, party goods and hardware.

Stronger demand from consumers looking to save money has created a great opportunity for Dollar Tree to open new stores and expand product offerings. During the first quarter, the company opened 83 stores, closed seven stores and expanded or relocated 41 stores.

Management’s efforts are paying off, evidenced by accelerating sales and earnings at a time when other retailers are suffering from declining sales. Dollar Tree’s balance sheet is strong with modest debt and plenty of cash to augment management’s aggressive expansion plans.

Dollar Tree reported excellent results for the quarter ended 4/30/11. Sales increased 14%, earnings per share (EPS) soared 67% and same store sales surged 7%. The company’s wider assortment of products, recent acquisitions and many new stores are meeting strong demand from consumers.

I expect sales to increase 11% and EPS to advance 16% during the next 12 months. At 15.1 times our forward 12-month EPS estimate of 4.15, DLTR shares sell at a very reasonable price. The company does not pay a dividend now, but dividends could be forthcoming within the next couple of years. DLTR shares are low risk.

EZCORP operates 500 pawnshops plus 500 short-term consumer loan stores in the U.S., Mexico and Canada. The company provides convenient, short-term lending to customers, secured by their personal property including jewelry, electronics or other personal property. Pay-day loans are offered at high interest rates for very short periods of time.

Many banks are not lending to consumers in need of loans, and high unemployment is forcing many people to seek pawn loans. I expect banks to maintain tight lending conditions for another two years or more. High unemployment and under-employment also could linger into the foreseeable future.

EZPW is aggressively opening new stores and acquiring small businesses to meet demand and to gain market share in North America despite new regulations aimed at curbing exorbitant lending rates. EZCORP is complying with the strict new regulations and also is unveiling innovative services, while some of its competitors charge exorbitant lending rates. EZCORP’s above-board methods provide a competitive advantage.

The company’s sales rose 21% and EPS advanced 31% during the quarter ended 3/31/11, which was better than expected. Same-store revenue increased an impressive 12%. I forecast sales to increase 13% and earnings per share to rise 19% during the next 12-month period. Growth in the U.S., Canada and Mexico should increase at a solid pace, and the company’s expansion into Australia, the United Kingdom and Europe is producing better than expected results.

EZCORP’s balance sheet is very strong with minimal debt and plenty of cash to fund future expansion. The company does not pay a dividend and may not for some time. EZPW’s shares are medium risk and offer excellent value at 11.3 times my forward 12-month EPS estimate of 2.75.