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EZ Corp -- >>> Choosing Stocks the EZ Way

By Chad Henage
June 27, 2012


http://beta.fool.com/mhenage/2012/06/27/choosing-stocks-ez-way/6300/?ticker=EZPW&source=eogyholnk0000001



Tickers: CSH, EZPW, FCFS

EZCORP (NASDAQ: EZPW) is a company that can't seem to get the respect the company deserves. The main problem most investors have with this company is they expect a pawn store operator won't perform well if the economy continues to improve. This is simply not true. EZCORP is proving its doubters wrong with each quarter, but because the company misses estimates by 1-4% the stock suffers. If you look in detail at what is happening I think you'll see the same opportunity I see.

First, let's see how EZCORP compares to its peers:



Name


P/E On '12 Earnings


Growth Expected


PEG


Free Cash Flow Per $1 of Assets (last full year)




EZCORP


7.83


15.00%


0.52


$0.15




Cash America (NYSE: CSH)


8.58


16.00%


0.54


$0.22




First Cash Financial Services (NASDAQ: FCFS)


14.2


20.00%


0.71


$0.14


You can see that each company sells below its expected growth rate, and all three generate significant free cash flow from their asset base. However, EZCORP sells for the cheapest relative valuation. When compared to First Cash Financial, the company also generates better free cash flow.

Looking at EZCORP's recent earnings report, not only did the company report revenues up 23% and EPS up 16%, but same store sales were up 4% in the U.S. and up 9% in Latin America. International expansion is what EZCORP expects to drive revenues and earnings in the future. Look at the difference between U.S. and Latin American expansion over the last quarter and you can see the company's plan:



Category


U.S. Stores


Latin America Stores




Current Stores


947


192




New or Acquired Stores


23


58




% of Growth


2.43%


30.21%


Though Latin American stores only account for 20% of the total, this division is growing significantly faster than the U.S. division. Just as an example, while U.S. revenues were up 14%, Latin American revenue jumped 110%. One additional growth driver for EZCORP is, the company recently acquired 60% of Crediamigo. This company is one of the largest and fastest growing providers of payroll loans in Mexico. EZCORP also is internationally diversified through ownership stakes in multiple companies.

EZCORP is invested in companies across the globe that fit with its business model of pawn shops and short-term lending. For instance, the company owns 72% of Cash Genie which is a leading provider of online loans in the U.K. Cash Genie is one of the top 10 online lenders for cash advance loans of $120 to $1,200. EZCORP also made an investment in Albemarle & Bond Holdings plc, which is one of the largest pawnbrokers in the U.K. Albemarle operates 170 pawn stores with the same services that EZCORP offers on this side of the pond. One of EZCORP's most significant investments is with Cash Converters International. This is a company with over 600 pawn-type stores that are both owned and franchised worldwide. These investments give EZCORP exposure to growth internationally, without the cost of building and running its own network of pawn stores. Additionally, these investments are growing in value over time, while any goodwill on EZCORP's balance sheet is being written off against earnings. Over time this could become a valuable hidden asset for the company. You can see that EZCORP is much more than just a U.S. pawnbroker. What should investors expect from the company for the balance of this year?

The biggest drag on EZCORP's results is, customers are shifting away from gold to satisfy their immediate cash needs. Since nearly 21% of revenues in the first quarter were scrap sales, this is a significant issue. As gold prices have fallen, it becomes a less attractive resource for customers to use as an immediate cash source. Primarily due to this shift in consumer behavior, the company expects slower inventory turns and downward pressure on margins. Even with all of this built into expectations, the company still believes they will achieve EPS for the full year of $2.85 to $2.95. Considering that analysts expect $2.89 for the full year, there is a better than 50% chance that the company will beat full year estimates. As the company continues to expand its Latin American and Mexican operations, revenue growth and thus earnings growth should pick up. With the stock selling for less than 8 times forward earnings, EZCORP should be an EZ stock for investors to pick up.

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