It takes visionary management to see when the course a company has been on for awhile needs to change. In fact, recognizing changing winds is essential for management and investors alike, as resting on one’s laurels can put a company behind the competitive curve and leave it scrambling to catch up.
No one knows this better than EZCorp (EZPW).
The consumer finance sector has experienced two big shifts in recent years and companies like EZCorp have felt them firsthand. First, payday lending matured in the U.S, with store counts hitting saturation points. Then, the financial crisis hit and, since one must have a job to get a payday loan, that short-term credit product struggled to grow.
Simultaneously, however, people shifted to pawnshops to get short-term credit. Even better, gold prices soared, sending many people into these same stores to sell off their gold. That sent earnings at EZCorp and companies like First Cash Financial Services (FCFS) through the roof. In addition, these companies moved aggressively into the pawn market in Mexico, where it has exploded.
Now, however, gold prices have fallen and payday remains moribund. As a result, EZCorp has started to acquire various businesses to buttress its modest U.S. pawn growth and gangbusters Mexican pawn growth. This means the business is transitioning, so there are acquisition costs and expenses associating with closing underperforming legacy stores — all this is reflected in the company’s earnings report.
Total revenues were up 5%, but after backing out gold scrapping, total revenues were up 13% and earnings assets were up 21%. How bad was the impact of gold — the reason it has become time to move on to other initiatives? Well, it cost the company $10 million in net income. Add to this the $21 million in costs associated with the closing of 100 legacy stores, and you can see how winding down those businesses is impacting the company.
But that 21% increase in earning assets is important, because it reflects higher balances on all forms of consumer credit in both the U.S. and Mexico. General merchandise loans were up 11% in total and a very solid 9% on a same-store basis. The company has also convinced its customers to move into newer products like installment and auto title loans, which were up 48%.
Particularly interesting to me is the recent acquisition of GO Cash, an online lending platform. Loan book increased 63%, and the company expects the move into a state-by-state licensing model to push the acquisition into profitability in the first half of the next fiscal year.
Plus, as a I mentioned before, Latin America is crazy good. The Mexican pawn operation saw a 30% increase in pawn loan balance, and 18% on a same-store basis. Revenue from pawn increased 39%, up 17% on a same-store basis. I particularly love the payroll withholding loans — an acquisition from last year — where total loan balances increased 53%.
The company also continues to expand its UK online lending platform, is expanding pawn operations into Canada, and is adding more new products in response to both customer demand and regulatory changes.
It’ll take awhile for EZPW to transition into all these new models but in the meantime, it continues to generate solid revenue and cash flow and has plenty of credit available. Plus, the company only trades at a P/E of 7.
Considering it will eventually see some 15% to 20% organic EPS growth, that makes EZCorp an extraordinary value with big upside.
As of this writing, Lawrence Meyers was long EZPW.