Author Topic: EZPW - EZCorp  (Read 68477 times)

DTEJD1997

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Re: EZPW - EZCorp
« Reply #220 on: July 11, 2018, 07:41:40 PM »
Hey all:

I strongly suspect that the recent weakness in the stock price is due to the analyst earnings downgrade.

I am bit suspicious of it...the analysts were way behind on the comeback of the company.

They are clearly putting the newly raised capital to work.

I am reasonably confident that the recent acquisitions are going to be accretive.  If that is the case, it is hard to see HOW the company has lower earnings than what was previously thought.

Of course, "the street" does not like the debt issues.

I think the stock is mildly under priced.  If they can execute well in the next few quarters, perhaps we'll see a spike in price? 


DTEJD1997

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Re: EZPW - EZCorp
« Reply #221 on: August 01, 2018, 03:17:07 PM »
Hey all:

EZPW has been down bigly lately to $11.35/share.

I am going to guess that it opens up down quite a bit.

Earnings were up tremendously to $.27/share (up 163% yoy) for the quarter.  HOWEVER, that included some one time gains.  On a continuing basis, earnings were only $.14/share (up 27% yoy).

LatinAm operations continue to slog ahead, and now account for about 47% of the sales.

The balance sheet strengthened too.

Clearly EZPW has massive operational problems and the future looks pretty dim.

I just wish EZPW could really put something together like TSLA!  Then the stock would go UP instead of going down.

Oh well....maybe some other time!




CLM5

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Re: EZPW - EZCorp
« Reply #222 on: August 02, 2018, 08:36:01 AM »
Is DTEJD1997 the only person left here holding EZPW?

I think many people are over-looking or not appreciating how cheap/what the returns are like on these latin american acquisitions. True, they don't report any financials for the acquisitions, but that doesn't mean we can't figure it out.

I've gone back and looked through the impact on the financials from the acquisitions to get a rough estimate of the PLO, per store costs, and profitability of each one. From this, it seems like the acquisitions are generally done at around 4-5x cash earnings in Latin America, with meaningful room for per store improvement after the acquisition. You can already see it making an impact on the standalone Latin American financials. In the past year, PLO, pawn service charges, and profitability have doubled for Latin America. These deals are extremely cheap and extremely accretive. The US acquisitions, on the other hand, are a bit more expensive. The LA acquisitions look much more attractive.

This isn't to say that their decisions regarding funding recently haven't been horribly stupid. By 2024, given the recent acquisitions and turnaround/focus on pure play pawn, ezpw should be raking in a lot of cash. On today's shares outstanding, the 2024 FCF multiple is likely sitting somewhere in the low single digits. So in effect, the convert was an issuance of stock at a very low price, which will then be repurchased later at a much higher price. Not ideal. I think we can all agree management isn't very bright when it comes to raising capital.

With that being said, EZ Corp didn't have any other options for cheap debt when the first convert was issued. They used it to retire outstanding debt that had ridiculous effective interest rates. Convertible debt was likely their only option to do this on the cheap, and at least has the positive effect of increasing cash flow pretty heftily for the next 6 years. And while management may not be effective at raising capital, at least this management team knows how to efficiently run a pure-play pawn business. Major step up from previous management, and we should continue to see improvements in PLO and per store operating costs across their store footprint.

Of course, this is all ignoring the fact that Phillip Cohen is over 70 years old, could be looking for an exit relatively soon, and FCFS has also been rapidly consolidating the pawn industry.....

Edit: Forget to mention, I think a big part of the price collapses after each convert issue was caused by non-economic selling - the institutions that participated likely bought the converts and sold short common equity as a hedge. I could be wrong about that, but better for us if thats actually the case.
« Last Edit: August 02, 2018, 10:00:44 AM by CLM5 »

racemize

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Re: EZPW - EZCorp
« Reply #223 on: August 02, 2018, 04:46:05 PM »
I sold a while back, but I follow it as I probably know more about this stock than most others.

With regard to the quarter, this is the worst part of the year for them.  That being said, the results weren't good. 

My issues with the stock are:
1) profitability is really really bad compared to FCFS and historical profit margins.  I don't know why.  My thesis before was that they could get their cost structure right, but I don't see much evidence of it, and I have trouble even seeing them getting to $1.00 EPS soon.  Given these latin american acquisitions, maybe they can get it done in 2 years?
2) Except that these share issuances were horrible.  The CEO told me that "we'll just roll it".  Well, that means the debt load will be really high, unless they do a poor job of growing the company--either one sucks for shareholders.
3) Cohen.

I was willing to hold my nose for 1 and 3, but not combined with 2.  If they hadn't done that, I think the stock could have been worth $16-$20 pretty easy.  Maybe it will still work out that way.

Ismael

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Re: EZPW - EZCorp
« Reply #224 on: August 02, 2018, 07:37:36 PM »
I don't understand the heartburn with the converts.  The multiple on the cashflows they are giving is higher than the multiple on the cashflows they are getting.  Sure it would have been better if they could finance the acquisitions with plain vanilla debt, but it doesn't look like that was really an option. 

CLM5

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Re: EZPW - EZCorp
« Reply #225 on: August 03, 2018, 08:25:10 AM »
I sold a while back, but I follow it as I probably know more about this stock than most others.

With regard to the quarter, this is the worst part of the year for them.  That being said, the results weren't good. 

My issues with the stock are:
1) profitability is really really bad compared to FCFS and historical profit margins.  I don't know why.  My thesis before was that they could get their cost structure right, but I don't see much evidence of it, and I have trouble even seeing them getting to $1.00 EPS soon.  Given these latin american acquisitions, maybe they can get it done in 2 years?
2) Except that these share issuances were horrible.  The CEO told me that "we'll just roll it".  Well, that means the debt load will be really high, unless they do a poor job of growing the company--either one sucks for shareholders.
3) Cohen.

I was willing to hold my nose for 1 and 3, but not combined with 2.  If they hadn't done that, I think the stock could have been worth $16-$20 pretty easy.  Maybe it will still work out that way.

While I submit that Cohen is a real risk (although he is old and most likely looking for an exit, which makes a sale to FCFS more likely..), I'm not in agreement with the other 2 points.

On the first point, their operating margins this year are over 8% versus FCFS's over 12%. I wouldn't describe that as being really really bad vs, and a chunk of that can definitely be ascribed to scale. However, I think it should be mentioned that EZPW's cost per store is much higher than FCFS's, which didn't used to be the case. Costs bloated once management got shaken up when Joe Rotunda left the first time around. He used to run the pawn extremely lean with lower costs than FCFS. Now that hes back, I would only expect that gap to lessen. A big part of the reason why it hasn't is because there have been quite a few one-time investments over the past 3 years increasing costs - POS system, store refurbs, increasing inventory space, etc... Corporate expenses, on the other hand, have come WAY down since new management. I wanna say it's come down from around $80mm annually to about $50mm now. That's a 4% bump to margins right there.... I would have liked to see the per store costs come down since the management shake up as well, but I'm alright with sitting around while management makes investments in store level changes. I have heard tell of cost saving changes that have supposedly been undertaken at individual stores, but I'm not seeing evidence of it in the financials yet.

On the second point, I have a few qualms with this. First off, the debt load isn't really high and most likely won't ever be really high unless cash flow falls off a cliff. Their current net debt is not much over 1x EBITDA..... Their cash flow in coming years is likely to be over $100mm annually. The only way their net debt significantly increases from here is if they spend like drunken sailors on acquisitions. I just don't see it happening, and even if it does, those acquisitions are very accretive. My other qualm with this is that you're ignoring the position EZPW is in when it comes to financing. There was actually an answer relevant to this on the CC this week. In response to whether or not they looked at straight debt for the financing, Stuart essentially said that First Cash has the ability to do an unsecured line, but EZCorp doesn't. If EZCorp were to do an unsecured line, the interest rates would be in the double digits. EZCorp is likely saving around $100-150mm in near term cash flow over the next 7-8 years doing converts instead of straight debt. Once these converts expire, its likely that they'll actually be able to issue straight debt for reasonable rates as long as they perform operationally until then. That's probably why Stuart isn't worried about rolling the converts over into straight debt at that point. I understand that this is still stupid, because he's essentially issuing cheap equity to buy it back at more expensive prices later... but it unlocked many opportunities in the near term. It was likely their only option and I believe it is still creating value.

racemize

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Re: EZPW - EZCorp
« Reply #226 on: August 03, 2018, 04:46:21 PM »
On margins, it is pretty easy to show it isn't good (even if it is better than the horrible situation it was in before).  This is very easy to see if you pull up historical net profit margins (e.g., ValueLine).  For example, if they get to $0.85 a share this year (and it isn't clear they will), that will be a net profit margin of 6%.  Historic margins were 12%.  FCFS net margins are 9% right now (still 50% higher than EZPW), but that's largely because FCFS acquired Cash America, who had awful margins; FCFS previous margins were also 12%.  EZPW won't say anything about whether they can get to these margins again, but I have my doubts.

With regard to the debt, I disagree that they got more than they gave up.  The way that they determine whether to buy stores or not is based on a multiple of PLO + inventory.  Pawn stores will typically sell in a range between 3x PLO + inventory to 7x PLO + inventory, depending on quality.  Their U.S. stores are worth quite a bit more than their Mexican stores (and FCFS Mexican stores) because they have more PLO and inventory, usually around 2x more.  They issued shares at a 3x PLO multiple (at $10) to buy Mexican stores, and I doubt they were buying at less than 3x PLO (we don't actually know, but it is quite rare to be able to do so).  If you valued their stores at 5x PLO, which I believe is reasonable, that's $15 per share at the time, so they were issuing at 66% of a decent measure of IV to expand.  I think they did this because their compensation is at least partially based on EBITDA (not EBITDA per share), so they don't care about issuing shares if it increases EBITDA. 

As to the fact that they were in a bad situation debt-wise--that doesn't excuse poor decisions.  They didn't have to raise debt.  Pawn stores (when properly run) generate a lot of cash.  They could have improved operations and bought with cash or waited until the market believed they weren't horrible operators.  But that's not what their incentives dictate. 

Also, with regard to saving $100-$150 million in interest costs, it isn't really saving if it costs you $300 million in equity costs (assuming that it trades at $15+ anyway).  So I don't really think it created value, unless the market continues to value EZPW at less than $15, in which case shareholders aren't doing well.


Ismael

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Re: EZPW - EZCorp
« Reply #227 on: August 05, 2018, 10:37:01 AM »
So the company is giving undervalued cashflows to get undervalued cashflows.  Even if the acquisitions aren’t accretive, they open up new opportunities for the company.

1.   Scaling their small S. American presence opens up a wider opportunity set for future acquisition opportunities in S. America (when they have access to cheaper capital)
2.   The S American acquisitions make EZPWs asset base more similar to FCFS’s which makes relative valuation easier.  If EZPW can bring its margins back to where FCFS’s are, then it should see multiple expansion to parity with FCFS.  And, of course, this multiple expansion would be in addition to the increased cash flows associated with the margin expansion.

Everyone agrees that the company is using expensive capital for the acquisitions, but if they don’t act now, FCFS will continue to make acquisitions and the opportunity may not be there when they have access to cheaper capital. 

In addition to the margin and multiple expansion opportunity, this company also provides cash flows that have a unique correlation to the broader economy.  For many portfolio managers, uncorrelated cashflows are highly desirable. 

While this company appears dirty (and maybe it is), it’s probably the least bad way to serve the unbanked market.  It is much better than the Timothy Geithner type of predatory marketing and draconian collection business model.  There have been attempts at creating more “socially” minded micro-loan business models, but I am not aware of any that were successful.  (Maybe blockchain will change this.) 

So we have an under earning and expanding asset with uncorrelated cashflows serving a real societal need in a better way than the known alternatives and it is trading at a large discount to peers. 

There certainly are reasons for the discount, but if some of these reasons are corrected, this investment should work out very nicely, although not as nicely as it would if management had access to low cost growth capital. 

Homestead31

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Re: EZPW - EZCorp
« Reply #228 on: August 29, 2018, 10:57:05 AM »
there has been a lot of talk about management/cohen not appreciating the value of the equity here due to the issuance of converts.  i get it - i don't love the converts either - but after going back through all of the available 10Ks and adjusting for splits and shares that were used for acquisitions, share count growth has historically been about 2% a year, which is entirely reasonable in my view.  it is hard to give these guys the benefit of the doubt b/c of Cohen's history of abuses, but the hard data shows that he has respected the equity over a long period of time.

since everyone claims to be a value investor these days and most people have read The Outsiders there is this huge backlash against the convert, but the reality is that issuing the 2025 convert was essentially an option on issuing stock at $15.90 (the convert price) which at the time was about 9x EBITDA.

I don't think anyone on this board or elsewhere would have complained if they issued stock at 9x EBITDA in order to do an acquisition at 3 or 4x EBITDA. That is the kind of accretion that drives long term value creation.

The problem however is that they raised the capital and didn't make a huge acquisition out of the gate, so everyone is focused on the dilution rather than the accretion.

if you take the emotional revulsion caused by Cohen out of the equation, and further remove the time lag between raising money from the convert and deploying that capital in acquisitions, and just look at this rationally, i think it is a good business that is executing at a very high level available at a very low price, with a free option that if/when Cohen collapses the B shares the stock will go up ~50% over night.