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The Future Of Pawning

|Includes: EZCORP, Inc. (EZPW)

It's on TV. It's embedded in the culture. It's a business model that's as old as the newspaper. The art of pawning is a beautiful thing. Can't get a loan from the bank? No intangible assets? Need $500? Have a gold watch? Auto title? 10 million people across the country in any given time are in constant need of fast cash and have no bank account to show for it. While the major financial institutions are quick to shove out loans to those they consider "safe loans", the people with nothing usually get just that in a loan.

My buddy decided to apply for a $10k loan at Wells Fargo last year only to be denied on the spot. The problem? He had no student loans, just graduated college with a great job lined up making over $55k, and the only debt was a car payment of $311/month. He was denied on the spot because that was considered a risky loan due to the car payments. Since 90% of grads don't have the same circumstances as my friend and are living on some kind of student loan debt/credit card debt, where do you go for a $1k loan for buying furniture, TV, bed, etc to move into your apartment after college? You can't wait to accumulate savings through a once a month paycheck- unless you want to live in an empty apartment for a couple months. Enter pawn loans, fast cash solutions, and whatever version of a short-term loan that you can think of. More importantly, and more popularly, pawn loans from actual pawn stores are the fastest and most assuring way to avoid scam and hassle.

Luckily, pawn shops have realized this immense need from the consumer and have taken the right steps. Take EZ Corp. (NASDAQ:EZPW) for example. EZ Corp. has placed themselves perfectly to continue their long-term growth trend. They've invested as much as possible in every successful short-term loan provider who have the potential to be superstars. What does EZ Corp have to do? Make sure they make the right choices. Wait until five years from now- their growth will triple- at least.

There are two macro problems that are affecting the company's price right now. The obvious one is gold- something that I nor anyone else knows what will happen to its price over the next year. What I do know is that banks are destroying the economic value of their dollars all around the world. No central bank in Europe, US, China can say that they are not printing the green stuff like mad men. Let's keep it simple. The undeniable reason for gold's price increase over many decades is inflation- something that HAS to increase with Bernanke pressing on the printing pedal. Give it time and let the markets eventually correct themselves from this spike. It may not happen tomorrow or this year, but be sure of this- it will happen. Pawn operators know this and are positioning themselves and buying their own shares- something to take seriously if you cannot find value in your own portfolio.

The second reason is less obvious. Consumer regulation has been scrutinizing that these loans have been leaving the customer in a debt trap. The fact is that the consumer needs the money and knows the consequences- it's the price of doing business and accumulating the risk. Consumers are not blindly going into these deals- it's on paper and are told repeatedly the fine print. It's not unethical- it's business. The even better part is that pawnshop operators don't even have to go into those markets that have strict regulations. The demand is so great and will always continue to grow so long as people have a determination to thrive and live a better life.

Let's take a look at the fundamental analysis to see what we can expect for a ten year return if we invest in EZPW.

Current Price- $21.30

Current EPS 2013- $2.65
EPS 2023 (10% growth/year)- $6.87

Avg. P/E ratio- 12x
2023 stock price- $82.44

10 year compound annual return- 14.49%

Not bad. This is the average case- meaning that if the company has a so-so performance, it will garner these returns. This could possibly be one of the top investments of the decade if it outdoes its initial guidance (there is substantial upside to the positive scenario).

10 year compound annual return (EPS growth 15%)- 19.70%

By the way, EZ Corp has grown its EPS on average 30%/year for the past ten years. These numbers are saying a lot more than EZ Corp's competitors like Cash America (NYSE:CSH) or First Cash Financial Services (NASDAQ:FCFS). Both have relatively high P/E ratios (15x and 19x) compared to EZPW with not as much historical growth nor future potential guidance on their part.

Also, check out my instablog and articles from last year about the predictions I made- see if you can find any that didn't come true.