Author Topic: EZPW - EZCorp  (Read 68476 times)

racemize

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EZPW - EZCorp
« on: January 14, 2014, 07:19:41 PM »
This investment definitely has some issues, so prepare to hold your nose (This came from Kevin, btw).  EZ Corp makes money via various consumer loans (pay day, title, multistage, etc.), the pawn business, and gold scrapping.  During the recession and gold boom, EZ Corp had significant tail winds and the gold scrapping business did really well, and became as high as 33% of earnings.  However, 1) gold prices have dropped in the last year; 2) competition for gold scrapping has increased dramatically; and 3) people have run out of gold reserves to go sell to the increasing number of scrappers.  Accordingly, this portion of the earnings has decreased dramatically.  A side effect of gold dropping is that loan balances for the pawn business has decreased, since gold is often used as collateral.  Thus, the falling gold prices have had a big impact on the business.

Several things happened in 2013.  First, EZ Corp decided to discontinue several gold only shops in Mexico and transform some smaller shops to full pawn stores in Q3, because of the issues above.  This resulted in a charge of ~$0.40/share charge.  Then, in Q4, they wrote down their 30% investment in A&B pawn in the UK, which overleveraged itself on the gold scrapping business and has now put itself up for sale.  That write down was ~40 million down to 10 million on the books, which is ~0.80 cents a share.  Adding just these two back to full year earnings of ~$1.8/share.  It is now selling at 11 per share, giving you a pretty low earnings multiple.  It seems to me they kitchen sinked Q4, but if you normalize that Q and extrapolate it, you get somewhere in the $1.53 range.  Street consensus is for 2014 to show 1.44/share and for 2015 to show 1.92.  Valueline expects earnings of $2.25/share in 2014.  Earnings in 2011 excluding gold scrapping was $1.41 and in 2012, $1.88. 

Other issues: they had some bad underwriting on a few new loan products, including their new online venture.  Bad debt for some loans increased fairly dramatically, but Q4 conference call indicated that they had done this on purpose and that essentially the new bad debt level was targeted and still profitable, allowing them to increase their loan book (I think referring to title loans).  Additionally, gross margins dropped significantly, and needs to come back in line to historic levels, which they indicated they will focus on.

So all that is the good news—here’s the bad news.  The governance is awful.  Really awful.  First, there’s an A/B structure, and the publicly traded shares are non-voting.  The single holder of the voting shares is Phillip Cohen, who has been described as a crook.  He’s had this same structure before with Friedman’s who eventually went bankrupt due to major fraud by the CEO/CFO.  Cohen settled for 200k.  Cohen pays his company 6,000,000 a year for “advice” and they cover additional incidentals.  He’s also got the chairman in his pocket.  However, this has been true for 15-20 years, so the market has ignored it in the past and it hasn’t blown the company up.  There’s also potential regulatory issues, particularly with payday loans, but in areas where payday loans have been banned, the pawn business does a lot better, since the same people need the money.
« Last Edit: January 14, 2014, 07:23:15 PM by racemize »


racemize

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Re: EZPW - EZCorp
« Reply #1 on: January 14, 2014, 07:20:55 PM »
Here's Kevin's original write-up from the highest conviction thread:

Quote
EZPW.  Here is the write up I put on my blog.  http://canadianvalueinvesting.blogspot.ca/

Ezcorp had an unusually bad year in fiscal 2013 for a couple of reasons. The biggest reason for this was the huge drop in the price of gold. Gold started 2013 at around $1700 per ounce and ended around $1200 per ounce. That 30% decline contributed to some really tough business conditions. In the pawn business, gold and jewelry are the two most common forms of collateral. Moreover, unless you’ve been living under a rock in recent years, the gold scrapping business has been big business. 
 
Conditions in Mexico were extremely tough for the company in the gold pawn business. On the latest conference call they discussed how competitive it has gotten down there. The industry got so competitive that everyone was posting the price of gold they were willing to pay for scrapping. That squeezed margins. This also led to the closure of 57 gold only stores in Mexico. 
 
Now to add more insult to injury, the company recorded a $43 million ($29 million after tax) impairment charge on its investment in Albemarle & Bond. The UK pawn lender had a very tough year and was delayed in releasing their financials. This wrote off the majority of their investment in the company. Albemarle is now for sale. 
 
Lastly, the company’s operating expenses have gotten way out of line. In 2011 operating expenses were 33% of revenue and in 2012 they were 34%. In 2013, operating expenses rose to 41% of revenue. This is obviously not very good performance but leaves lots of room for improvement. 
 
So what does all this mean? Basically EZPW was still profitable in 2013, albeit marginally. Earnings have risen every year since 2002. The company sells for 70% of book value.  Book value has grow at 17.5% over the past 10 years.  Debt is only 19% of total capital so they are not heavily financed.  Interest is well covered.  There are a few weird quirks with this small cap but I won't bother you with them here (read the 10-k and listen to the conference call for details).
 
If you exclude the one-time expenses that occurred in 2013 the company would have earned around $1.70 per share. That works out to a current P/E ratio of 6.5. Now if you, like me, assume that the gold scrapping hay-days are over (no recovery of this business) but they can reduce operating expenses by 3%, then EPS will rise to $2.35 per share (P/E = 4.7). If operating expenses can get back down to historical levels of 34% of revenue, EPS will rise to $2.95 per share (P/E = 3.7). 
 
It doesn't take an advanced degree in math to see that EZPW is worth at least double the current quote (at a minimum) and up to four times the current quote (at a maximum).  Let's call fair value roughly $30/share.  It currently sells for around $11.50, down from the $30 level a couple years ago.

APG12

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Re: EZPW - EZCorp
« Reply #2 on: January 15, 2014, 05:24:37 AM »
Cohen pays his company 6,000,000 a year for “advice” and they cover additional incidentals.

Correction: $7,200,000.  It seems to rise 20% every year.  :-\

racemize

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Re: EZPW - EZCorp
« Reply #3 on: January 15, 2014, 05:46:59 AM »
Cohen pays his company 6,000,000 a year for “advice” and they cover additional incidentals.

Correction: $7,200,000.  It seems to rise 20% every year.  :-\

Ah yes, right you are.  Looks like just a renewal for 2014.

yadayada

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Re: EZPW - EZCorp
« Reply #4 on: January 15, 2014, 05:55:12 AM »
Is the discount really big enough here. For shady management and risks of interest rates on those pawn loans being given a haircut? ABM and HAT for example are forced to charge a much lower interest rate.

That said, what about HAT?
https://www.google.com/finance?q=LON%3AHAT&ei=AJPWUqr7GISIwAOTIg

At least regulation is not much of  a risk here. And you dont have that shitty shareholder structure. And you basicly pay the same price :) .

It is actually cheaper if you think they can go back to 2012 levels, with a 4.75 PE.
« Last Edit: January 15, 2014, 05:57:28 AM by yadayada »

racemize

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Re: EZPW - EZCorp
« Reply #5 on: January 15, 2014, 06:27:58 AM »
Is the discount really big enough here. For shady management and risks of interest rates on those pawn loans being given a haircut? ABM and HAT for example are forced to charge a much lower interest rate.

That said, what about HAT?
https://www.google.com/finance?q=LON%3AHAT&ei=AJPWUqr7GISIwAOTIg

At least regulation is not much of  a risk here. And you dont have that shitty shareholder structure. And you basicly pay the same price :) .

It is actually cheaper if you think they can go back to 2012 levels, with a 4.75 PE.

I haven't looked at HAT; I wonder if they have the same future growth?  How much exposure do they have to the gold scrapping business?  What I like about EZPW is that you can essentially right off the entirety of gold scrapping and still have a decently low P/E.  It is not very hard to imagine this company is worth 20+, and it has been valued at over 35 in the past.  Underlying core earnings have been growing at ~15% for quite a while now, so even if the valuation doesn't come soon, the growth should keep pushing the price up.  There'd have to be some major underlying issues for that not to happen, I think.  Or gold would have to continue to drop in value this year.  Additionally, with EZPW, they have a huge amount of consolidation left in the pawn business and quite a bit of growth in Mexico.  I think regulatory concerns are mostly focused on payday lending, and not necessarily pawn business rates.

yadayada

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Re: EZPW - EZCorp
« Reply #6 on: January 15, 2014, 07:39:28 AM »
Is the discount really big enough here. For shady management and risks of interest rates on those pawn loans being given a haircut? ABM and HAT for example are forced to charge a much lower interest rate.

That said, what about HAT?
https://www.google.com/finance?q=LON%3AHAT&ei=AJPWUqr7GISIwAOTIg

At least regulation is not much of  a risk here. And you dont have that shitty shareholder structure. And you basicly pay the same price :) .

It is actually cheaper if you think they can go back to 2012 levels, with a 4.75 PE.

I haven't looked at HAT; I wonder if they have the same future growth?  How much exposure do they have to the gold scrapping business?  What I like about EZPW is that you can essentially right off the entirety of gold scrapping and still have a decently low P/E.  It is not very hard to imagine this company is worth 20+, and it has been valued at over 35 in the past.  Underlying core earnings have been growing at ~15% for quite a while now, so even if the valuation doesn't come soon, the growth should keep pushing the price up.  There'd have to be some major underlying issues for that not to happen, I think.  Or gold would have to continue to drop in value this year.  Additionally, with EZPW, they have a huge amount of consolidation left in the pawn business and quite a bit of growth in Mexico.  I think regulatory concerns are mostly focused on payday lending, and not necessarily pawn business rates.
it is in their annual report somewhere. But I don't think they had alot of exposure to gold scrapping. gold scrapping and debt is what did ABM in.

I think they are at roughly the same 2012 valuations. EZcorp is cheaper at like 4.2x 2012 earnings, but they had to write down more gold scrapping. HAT is like 4.7.

They both grew like weed, mostly because of the consolidation of pawn shops. But with HAT you dont have much down side risk with regulation (because of the already lower interest rates they charge) and the shady share structure. I would rather own HAT to be honest.

To give some quick hat numbers
revenue past 5 years (million)

129
125
126
84
53

and net income was ~
13
18
17
13
7

So if they get net income back to 2011 levels, it really is dirt cheap. And lot's of growth. And if we have another recession, they should do nicely.

What really does me in tho is their management. At least they are more aligned with shareholders. Not exactly super thrilled about them, but better then Ezcorp. And still more then enough consolidation left.
« Last Edit: January 15, 2014, 07:44:02 AM by yadayada »

racemize

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Re: EZPW - EZCorp
« Reply #7 on: January 15, 2014, 07:52:07 AM »
interesting.  Why is it so cheap?  I can understand why EZPW is, but given your description, it HATs cheapness doesn't appear to make sense.

yadayada

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Re: EZPW - EZCorp
« Reply #8 on: January 15, 2014, 08:23:12 AM »
Well same reasons I think, market thinks gold falling hurts them long term, and probably thinks that this is a recession business. If you take 2013 profit, it is trading roughly 10x earnings? They say they will start to use more electronics now as collateral.

Hmm also revenue is down to 50m from 63m in first half of 2013. . Don't own any stock, so havent really done taht much reading on them to be honest.

cr6196

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Re: EZPW - EZCorp
« Reply #9 on: January 15, 2014, 11:44:12 AM »
interesting.  Why is it so cheap?  I can understand why EZPW is, but given your description, it HATs cheapness doesn't appear to make sense.

Another reason for HAT cheapness is that the gold purchasing business was/is very very soft. For basically no invested capital HAT and ABM turned in millions of profits (it was the most profitable business I have ever seen). Wisely, HAT's management/board realised this wouldn't last but this business is still going to go to zero (unless the gold price recovers). As it constituted a large part of historical profit then the company looks cheap. These earnings have pretty much no relevance for HAT in the future. As the post above says they are trading at around ~10x '13 earnings (if you extrapolate out the half year results).

I have looked at HAT a few times as they have been on value screens for the past few years even before the decline in gold price (+1 for Mr.Market it seems). I was interested enough to do research every time but ended up passing. Each time they just went on to disappoint, every store they added resulted in less and less revenue. Of course, management look pretty good now, compared to the likes of ABM. Despite this, I still can't get comfortable with this situation.

The starting point is working out the sustainable level of profit. If we first take out purchasing and scrapping, the company is operating at a slight loss. Scrapping isn't going to zero and the company is working on costs, figuring this in I am guessing ~£2m is probably somewhere around the long-term, sustainable number. One possible source of further upside is an improvement in jewellery, the company reported a big improvement this month which suggests the company can push performance here. However, one source of downside is increased competition. This sector is just so cutthroat...online pawnbrokers, online payday loan providers, and established competition in non-jewellery pawnbroking on the high street (Cash Converters is one major one listed in Australia, I think). The pledge book is down quite a lot and I suspect this will be more than the improvement in jewellery. Taking all this into account, as well as the financial position of the company, I don't think this company is cheap at all. I think the upside from jewellery is outweighed by the threat of competition elsewhere (for example, the company has no reputation with electronics) and I think the company probably still has far too many stores.

Sorry to have diverted the thread but this is an interesting situation.

(I also forgot to add that the regulatory threat isn't exactly zero either as the payday loan operators have really come under a great deal of scrutiny. The Opposition here have been making a lot of anti-business noise so something would mostly likely happen if they came to power next election, which will be early next year at the latest, which isn't unlikely).
« Last Edit: January 15, 2014, 11:50:10 AM by cr6196 »