EZPW - EZCorp

[CLM5]

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]

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]

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]

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.

[DTEJD1997]

Hey all:

 

EZPW's released earnings.  They appear to be reasonably good.  The market reacted with the stock moving up $.75/share.

 

Unfortunately, they took another write down on Cash Converters in Australia.

 

Latin America seems to be growing & expanding nicely. 

 

Any thoughts?

[Gregmal]

I've only started following this recently and I think this is a good business, but am not impressed with management at all. They literally spent half the call making excuses and ducking questions about why they refuse to repurchase stock at these prices. They seemed to have a poor understanding of cost of capital, and seem to be of the belief that they're doing a great job... You don't want management who blows off issues raised by a big chunk of shareholders because they think they know better, when their long term track record is at best in the ballpark of mediocre. Just my 2c

[whistlerbumps]

Completely agree.  Management is good operationally (see relative results vs. FCFS) but bad with capital allocation.  The main issue stems from the corp gov due to the A/B structure and Phil Cohen's ownership.  That is why it is trading at 5x forward EBITDA vs. FCFS at 14x.  I agree it should trade at a discount due to these issues, the question is how much of a discount is proper?

[Homestead31]

i get that management - or rather the controlling shareholder - is a problem here, but this valuation is getting out of hand...  last quarter they put out a new slide in the deck https://s22.q4cdn.com/137492174/files/doc_financials/quarterly_reports/2018/Q4/Q4FY18-Conference-Call-Slides-Final_111418.pdf  see page 8

 

based on this slide, the stock is now trading at about 6.5x free cash flow to equity based on normalized capex, and not dinging them for spend tied to growing PLO, and they are growing, and with US unemployment sub 4% they are in the worst part of their cycle.

 

this might be the cheapest, growing, defensive stock out there.

[Guest roark33]

I don't know why people don't stop reading after the opening line.  Dishonest or self-dealing management seems like such an easy pass, why bother? 

[Homestead31]

i hear you, but there is a price for everything, and in a business with a 3,000 year operating history and a controlling shareholder that is not going to live forever, I would argue it makes sense to consider what the business is worth under normalized circumstances.

 

This clearly deserves a discount vs FCFS, but this is just kind of crazy at this point.

 

 

[Spekulatius]

With so many cheap looking stocks around, why bother with seedy management at all? The stock option bleed is terrible too, diluted shares up 6%YoY. Optically, the stock does not even look cheap currently. What does “normalized” even mean when you are riding a roller coaster stock like EXPE?

[whistlerbumps]

With so many cheap looking stocks around, why bother with seedy management at all? The stock option bleed is terrible too, diluted shares up 6%YoY. Optically, the stock does not even look cheap currently. What does “normalized” even mean when you are riding a roller coaster stock like EXPE?

 

Its actually not at all due to option bleed.  You have to be very careful with diluted share count as it sometimes includes the convertible debt when it goes in the money which is what happened at the end of this year (see note 3 of the 10k).  Basic sharecount which is a much more reliable metric has increased only 0.5% in the last 5 years and diluted sharecount was similarly flat until the 2024 notes became dilutive this year.

[KJP]

i get that management - or rather the controlling shareholder - is a problem here, but this valuation is getting out of hand...  last quarter they put out a new slide in the deck https://s22.q4cdn.com/137492174/files/doc_financials/quarterly_reports/2018/Q4/Q4FY18-Conference-Call-Slides-Final_111418.pdf  see page 8

 

based on this slide, the stock is now trading at about 6.5x free cash flow to equity based on normalized capex, and not dinging them for spend tied to growing PLO, and they are growing, and with US unemployment sub 4% they are in the worst part of their cycle.

 

this might be the cheapest, growing, defensive stock out there.

 

If you give EZCorp credit for the Hurricane impact that they claim they suffered and you attempt to pro forma the earnings to project what earnings would have been if all the LatAm transactions had closed on day 1 of the fiscal year, I get pro forma operating EBIT of about $87 million.  [i exclude all earnings or losses related to the Alpha Credit note and the CCV stake.]  Is that what you get?

 

With respect to current enterprise value, if you take market cap + face value of debt - cash - Alpha Credit note - CCV stake, I get an enterprise value of ~$640 million.  Is that what you get? [i would prefer to use market value debt to capture real value of embedded options in converts, but I don't have access to current trading price of any of the converts.]

 

That works out to about 7.5x my pro forma EBIT.  Does that sound right to you?

 

Also, what are you using for your "normalized" CapEx? 

 

[whistlerbumps]

I'm close to those numbers.  I have maintenance capex of about ~11mln and normalized capex of closer to 20

[DanielGMask]

i hear you, but there is a price for everything, and in a business with a 3,000 year operating history and a controlling shareholder that is not going to live forever, I would argue it makes sense to consider what the business is worth under normalized circumstances.

 

This clearly deserves a discount vs FCFS, but this is just kind of crazy at this point.

 

I don’t agree with the statement “there’s a price for everything” when talking about dishonest management. You may end up being right for several unforeseen circumstances, but my guess is that you are going to be surprised negatively!

[Homestead31]

I don't think it is appropriate to call management dishonest here.  To be clear, several years ago the controlling shareholder was pulling money out of the company through a consulting agreement and I am not a fan of his, but the consulting agreement is gone, and under Delaware law it will not be coming back.  So, he is a bad guy, but he is mostly neutered now.

 

Moving beyond that, one can certainly argue that capital allocation has been subpar - the market clearly hates the convertible bonds.  That being said, in last week's investor day they provided more information about their returns on capital, and quite frankly, they are impressive.  I am ok with diluting the equity a bit at $15.90 (the conversion price for the most recent convertible bond offering) which was something like 9x EBITDA at the time in order to make acquisitions at 5x EBITDA when those acquisitions have ROICs of 25% when mature.

 

I am definitely not willing to fully defend management or anything like that, but given that recent acquisitions are still maturing (revenue and margins both improving) and that they also said they will add another 100-200 stores in 2019, year over year EBITDA should be 50-60% higher for 2019.

 

Even if there is no multiple expansion, that is going to drive the stock price, and considering that the current multiple is less than half of FCFS's multiple, there is definitely at least the potential for multiple expansion, even though EZPW deserves a discount to FCFS due to the controlling shareholder.

 

AND, the 50-60% growth in EBITDA for 2019 is not assuming any benefit from a weakening economy.  if the economy is really about to crack, how many stocks are going to grow EBITDA at all, let alone by 50-60%+ next year?

[racemize]

I don't think it is appropriate to call management dishonest here.  To be clear, several years ago the controlling shareholder was pulling money out of the company through a consulting agreement and I am not a fan of his, but the consulting agreement is gone, and under Delaware law it will not be coming back.  So, he is a bad guy, but he is mostly neutered now.

 

Moving beyond that, one can certainly argue that capital allocation has been subpar - the market clearly hates the convertible bonds.  That being said, in last week's investor day they provided more information about their returns on capital, and quite frankly, they are impressive.  I am ok with diluting the equity a bit at $15.90 (the conversion price for the most recent convertible bond offering) which was something like 9x EBITDA at the time in order to make acquisitions at 5x EBITDA when those acquisitions have ROICs of 25% when mature.

 

I am definitely not willing to fully defend management or anything like that, but given that recent acquisitions are still maturing (revenue and margins both improving) and that they also said they will add another 100-200 stores in 2019, year over year EBITDA should be 50-60% higher for 2019.

 

Even if there is no multiple expansion, that is going to drive the stock price, and considering that the current multiple is less than half of FCFS's multiple, there is definitely at least the potential for multiple expansion, even though EZPW deserves a discount to FCFS due to the controlling shareholder.

 

AND, the 50-60% growth in EBITDA for 2019 is not assuming any benefit from a weakening economy.  if the economy is really about to crack, how many stocks are going to grow EBITDA at all, let alone by 50-60%+ next year?

 

I believe the most recent convertible was $10.  That's why I left.

[KJP]

I don't think it is appropriate to call management dishonest here.  To be clear, several years ago the controlling shareholder was pulling money out of the company through a consulting agreement and I am not a fan of his, but the consulting agreement is gone, and under Delaware law it will not be coming back.  So, he is a bad guy, but he is mostly neutered now.

 

Moving beyond that, one can certainly argue that capital allocation has been subpar - the market clearly hates the convertible bonds.  That being said, in last week's investor day they provided more information about their returns on capital, and quite frankly, they are impressive.  I am ok with diluting the equity a bit at $15.90 (the conversion price for the most recent convertible bond offering) which was something like 9x EBITDA at the time in order to make acquisitions at 5x EBITDA when those acquisitions have ROICs of 25% when mature.

 

I am definitely not willing to fully defend management or anything like that, but given that recent acquisitions are still maturing (revenue and margins both improving) and that they also said they will add another 100-200 stores in 2019, year over year EBITDA should be 50-60% higher for 2019.

 

Even if there is no multiple expansion, that is going to drive the stock price, and considering that the current multiple is less than half of FCFS's multiple, there is definitely at least the potential for multiple expansion, even though EZPW deserves a discount to FCFS due to the controlling shareholder.

 

AND, the 50-60% growth in EBITDA for 2019 is not assuming any benefit from a weakening economy.  if the economy is really about to crack, how many stocks are going to grow EBITDA at all, let alone by 50-60%+ next year?

 

I believe the most recent convertible was $10.  That's why I left.

 

No, unless I've missed something, the most recent (May 2018) was $15.90:  https://investors.ezcorp.com/investor-news/press-release-details/2018/EZCORP-Announces-Pricing-of-Private-Offering-of-150-Million-of-Convertible-Senior-Notes-Due-2025/default.aspx

 

The $10 convert was issued in July 2017:  https://s22.q4cdn.com/137492174/files/doc_news/archive/Debt-Press-Release-Final_062917.pdf

 

Management was quite free with equity (via the call options embedded in the converts) when its comp was not measured on a per-share basis.  Now that part of long-term comp is based on EPS, they're saying no more converts.  I don't know if "dishonest" is the right word to describe them, but I don't think I would describe this as "honest" conduct.

[racemize]

I don't think it is appropriate to call management dishonest here.  To be clear, several years ago the controlling shareholder was pulling money out of the company through a consulting agreement and I am not a fan of his, but the consulting agreement is gone, and under Delaware law it will not be coming back.  So, he is a bad guy, but he is mostly neutered now.

 

Moving beyond that, one can certainly argue that capital allocation has been subpar - the market clearly hates the convertible bonds.  That being said, in last week's investor day they provided more information about their returns on capital, and quite frankly, they are impressive.  I am ok with diluting the equity a bit at $15.90 (the conversion price for the most recent convertible bond offering) which was something like 9x EBITDA at the time in order to make acquisitions at 5x EBITDA when those acquisitions have ROICs of 25% when mature.

 

I am definitely not willing to fully defend management or anything like that, but given that recent acquisitions are still maturing (revenue and margins both improving) and that they also said they will add another 100-200 stores in 2019, year over year EBITDA should be 50-60% higher for 2019.

 

Even if there is no multiple expansion, that is going to drive the stock price, and considering that the current multiple is less than half of FCFS's multiple, there is definitely at least the potential for multiple expansion, even though EZPW deserves a discount to FCFS due to the controlling shareholder.

 

AND, the 50-60% growth in EBITDA for 2019 is not assuming any benefit from a weakening economy.  if the economy is really about to crack, how many stocks are going to grow EBITDA at all, let alone by 50-60%+ next year?

 

I believe the most recent convertible was $10.  That's why I left.

 

No, unless I've missed something, the most recent (May 2018) was $15.90:  https://investors.ezcorp.com/investor-news/press-release-details/2018/EZCORP-Announces-Pricing-of-Private-Offering-of-150-Million-of-Convertible-Senior-Notes-Due-2025/default.aspx

 

The $10 convert was issued in July 2017:  https://s22.q4cdn.com/137492174/files/doc_news/archive/Debt-Press-Release-Final_062917.pdf

 

Management was quite free with equity (via the call options embedded in the converts) when its comp was not measured on a per-share basis.  Now that part of long-term comp is based on EPS, they're saying no more converts.  I don't know if "dishonest" is the right word to describe them, but I don't think I would describe this as "honest" conduct.

 

Ah, sorry, didn't know they did another one since.

[DTEJD1997]

Hey all:

 

Earnings came out today.

 

Quite a substantial beat before the "one time charge"...

 

Stock appears to be up in after hours trading.

 

Stock has made quite a move in the past few weeks.  Will be interesting to see what it does on Thursday.

 

Anybody else still have a position in this?

[whistlerbumps]

Good operational quarter with strong cash flows and same store growth.  Will be interesting to see if they are able to make any sizable acquisitions (still targeting 100-200 store growth vs. 9 in Q1)

[Castanza]

Hey all:

 

Earnings came out today.

 

Quite a substantial beat before the "one time charge"...

 

Stock appears to be up in after hours trading.

 

Stock has made quite a move in the past few weeks.  Will be interesting to see what it does on Thursday.

 

Anybody else still have a position in this?

 

I followed this stock closely about a year ago and almost pulled the trigger on it. Fell off my radar for awhile but seeing this post has me interested again. I think the "pawn" business model will always be around. And if a downturn happens in the economy you can be sure this company will thrive. I view it almost as a hedge. The price point is certainly attractive and management seems a little more solid on direction. I think the LA expansions will be a good thing (as long as they are the right stores).

 

Not sure if I'll take a position yet but I'm certainly thinking about it. Seems market sentiment is on the precipice of changing direction. But who knows!

[whistlerbumps]

Good overview of EZPW thesis from Laughing Water Capital....

 

http://laughingwatercapital.com/wp-content/uploads/2014/01/Laughing-Water-Capital-EZPW-MOI-best-ideas-2019.pdf

[heth247]

Good operational quarter with strong cash flows and same store growth.  Will be interesting to see if they are able to make any sizable acquisitions (still targeting 100-200 store growth vs. 9 in Q1)

 

Aren't you guys concerned about the statement from the CEO that they are looking at strategic options to raise money to deal with the June convert maturity?  They said convert bond market is closed to them, and they cannot get unsecured bonds. What other options do they have? Will they issue stock?

[whistlerbumps]

They have 300mln in cash on the balance sheet so they can easily deal with the $190mln maturity.  What I think he was referring to was potentially needing more capital than their 30-50mln excess (post debt and cash to run business) if a lot of their acquisitions come to fruition.  They also said they would only raise more capital if the acquisition was accretive including the cost of the capital.