Pawnshop's prospects are puzzling

Berko: EZCorp Inc. stock looks enticing, but something seems amiss.
Published: December 30, 2012
Advertisement
;

Dear Mr. Berko: I'm not a gambling person, and I can't afford to lose money. But back in November 2010, I was advised to buy 100 shares of EZCorp Inc. by a good friend who worked for the company. He said he owned 900 shares and was going to buy 300 more as soon as he got his tax refund in 2011 because he was told the stock would double in one year. He took another job in another state, and I lost touch with him. The stock did go up to $35 about six months after I bought it at $24, but I did not sell. Now it's $19.61 a share, and I have a loss. I don't know what to do. I could cash in $1,900 of my $3,200 certificate of deposit and buy 100 more shares at this lower price if you think that would be a good idea. Please advise me on what to do.

HH, San Antonio

Dear HH: EZCorp Inc. (EZPW-$19.61) calls itself a “specialty consumer financial services company.” But truth be told, EZPW is really a pawnshop. Yes, so are Bank of America, Wells Fargo, JPMorgan Chase and Citigroup, but I'd sooner trust the folks at EZPW than the grifters at Wells or Citigroup, who will bite you with sundry fees for parking your money with them and then give you additional fees when you want your money back. The other significant difference between them is that when doing business with EZPW, you know you are getting screwed upfront, because it's all aboveboard. With Bank of America et al. — because they bury you with paperwork — you don't know you're getting screwed until it's too late to shut the door.

EZPW, an Austin, Texas, company, was founded in 1989 and began with 16 locations. Today it has 1,170 locations and 6,080 employees and has morphed into a $992 million-revenue pawnshop operation in the U.S., England, Canada and Mexico with earnings of $144 million, or $2.71 a share. And last year was the 12th consecutive year of revenue and income growth. Revenues for this year are expected to come in at $1.19 billion, and management believes that earnings will increase to $3.10 a share for 2013. Those numbers are impressive, especially in an economy that can't seem to get traction. EZPW shares have an attractive 4.6 current ratio, a book value of $16.82, consistent net profit margins of 14.5 percent and a 21 percent return on equity.

Though those numbers are darn impressive, I'm chagrined that the stock trades at a low seven times earnings. The stock, which traded at the $30-$33 level early last year, has plunged nearly 50 percent since. The current weakness, according to management, is because of a disappointing gold market (hmm) and confusing regulatory changes (also hmm) that encouraged analysts to discount their valuations severely. However, you may be pleased to know that Fidelity, Munder, Vanguard, State Street and BlackRock, among others, own more than 50 percent of the float. And you may be pleased that Ned Davis Research, Reuters and FBR Capital Markets have buy ratings on the stock. But EZPW's nearly 50 percent price collapse in the past nine months may be an anomaly, considering the company's consistent gains in revenues, earnings, cash flow and book value. Somethin's there we can't see.