There was a lot to be encouraged about in examining the most recent earnings report from EZCorp (EZPW). The numbers themselves look good on the surface — earnings were up 16%. Looking at the numbers beneath that, a novice investor might be disturbed by the same store numbers — which ranged from slightly down to slightly up. As usual, however, one must dig deeper and read the conference call transcript to see the opportunities that abound for the company.
Their pawn business is doing great, particularly in Mexico. US Pawn same-store sales were up 4%, and Mexican was up a whopping 29% on a constant currency basis. The company continues its aggressive expansion into Mexico and can expect smooth sailing there, as the country does not have a usury cap — and that’s written into the Constitution.
Pawn loans as a whole are yielding 147%, so these remain extremely profitable loans to make, and more are getting made at the expense of the payday loan business. Various channel checks are showing that people are hocking diamonds and gold with greater frequency as the economy struggles.
Despite the payday loan business being flat, investors should remember that 1) it is still very profitable, 2) it generates great cash flow, and 3) demand will increase again when the economy recovers.
More to the point, however, the company is wisely diversifying into other loan products in their stores. They are offering installment loans in some states — longer-term loans with lower returns than payday loans. This appeals to an entirely different clientele, as do auto title loans.
Auto title is, I believe, the next big product for this industry. As it stands, auto title lenders are a heavily fragmented sector. They are better deals to make for the lender, since the customer obviously has solid collateral behind the loan. Defaults tend to run lower than payday because nobody wants to lose their car. Not only has EZ started to offer these loans, but I believe they will make acquisitions further down the line. I believe auto title will be the primary growth engine in the US for EZ soon enough, with pawn continuing to power them forward as well.
But payday is far from dead. Canada is now the new frontier. All of the provinces recently passed individual legislation enabling payday loans, and at fantastic rates ($23 per hundred is the lowest). EZ plans to expand up there, and they will do well.
Overall, then, what we see is the US business keeping pace — not growing terribly much, but providing solid profit and cash flow. Auto title and installment loans will be the growth engines. Mexico is on fire, and Canada will likely follow in the same footsteps.
How is this actionable?
The stock trades at $12 on estimates of $1.41 in earnings, giving it a p/e of about 9 and a .60 PEG ratio. Given the cash flow that EZ throws off — nearly $65 million per year — and the extraordinary expansion opportunities in Mexico and Canada, I see a ridiculously undervalued stock whose fair value should be closer to $22. Long-term investors should see the value here.
Traders, however, have a great opportunity as well. The stock tends to trade in a broad range, between 10 and 15 as of late. That means plenty of upside for a swing trade. It’s also worth noting that the 200-day EMA is at $12.57, and several technical indicators show the stock is severely oversold on both the daily and weekly charts. If the stock breaks that $12.57 resistance, there isn’t much overhead to stop it from rising to the mid-teens.
There’s also an opportunity to sell some $12.50 puts for those who don’t mind holding the stock. The September 12.5 puts are selling at $1.00, offering $0.58 downside protection while potentially yielding 8% (56% annualized). With the stock in an uptrend and a breakout possible, this could add up to some free money.
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payday and title loans are always going to be a popular choice because the customers that are using these loans are everyday hard working people that need fast cash somtimes and do not have the credit to get a personal signature loan at a bank or other financial institution. so in all title loans and payday loans if used RESPONSIBLY are good options in todays tough market.
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