EZPW - EZCorp

[racemize]

There's no real details, so hard to know anything.  For many of the things going on governance-wise, I would bet they are close to the line, legally.

 

As long as it isn't fraud on the profitability, I'm not too worried.

[Laxputs]

I contacted the law firm:

 

We are prepared to challenge certain related-party transactions entered into by the Company. In particular, we determined that over the last three years the Company  paid approximately $18 million to Madison Park LLC for advisory services. Madison Park LLC is a business and financial advisory firm wholly owned by Phillip E. Cohen, the beneficial owner of all of the Company's Class B common stock and who has majority voting power in the Company. The purpose of our investigation is to determine whether these payments truly benefit the Company or whether they are designed to simply divert cash to Mr. Cohen.

 

If you own shares you can authorize the firm to proceed on your behalf.

[racemize]

I contacted the law firm:

 

We are prepared to challenge certain related-party transactions entered into by the Company. In particular, we determined that over the last three years the Company  paid approximately $18 million to Madison Park LLC for advisory services. Madison Park LLC is a business and financial advisory firm wholly owned by Phillip E. Cohen, the beneficial owner of all of the Company's Class B common stock and who has majority voting power in the Company. The purpose of our investigation is to determine whether these payments truly benefit the Company or whether they are designed to simply divert cash to Mr. Cohen.

 

If you own shares you can authorize the firm to proceed on your behalf.

 

Sounds about right.  Probably a good lawsuit to bring.

[xtreeq]

Albemarle & Bond shares suspended after banks withdraw support for turnaround plan

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10718565/Albemarle-and-Bond-shares-suspended-after-banks-withdraw-support-for-turnaround-plan.html

[yadayada]

Albemarle & Bond shares suspended after banks withdraw support for turnaround plan

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10718565/Albemarle-and-Bond-shares-suspended-after-banks-withdraw-support-for-turnaround-plan.html

 

that was some serious mismanagement there, jesus. Paying out dividends when they shouldn't , and the stupid overexpansion into gold buying. They were just gambling with shareholder's money really. It was all so avoidable.

[racemize]

yeah, pretty unbelievable. 

 

I'm surprised how much EZPW is dropping on the news, I'd already written this whole thing off, personally. 

[Rainforesthiker]

Notes from the EZ Corp Shareholder Meeting

 

Proposals 1 and 2 both passed; increasing the amount of shares available from 55.5 million shares to  100 million shares.  EZ Corp only had around 65,000 shares or so in reserve (that were not publicly held or set aside for stock based compensation, etc.)

 

From the investor presentation:

 

There are over 13,000 pawn shops in the US, and about 10,000 of these are mom and pop stores.  Lots of room for consolidation.  EZ Corp adds value when it purchases a mom and pop pawn store by 1) changing the appearance of the store to be more like a nice retail store; 2)  labor and overhead efficiencies; 3) more uniform lending standards; 4) store within a store / selling additional products; 5) pawn loan growth; and 6) Jewelry VIP

 

The CEO likened the Jewelry VIP program like Best Buy trying to sell its customers an extended warranty on electronics.  But whereas Best Buy only sells a fraction of its customers on an extended warranty, EZ Corp sells its Jewelry VIP program to 50% of its customers.  Jewelry VIP program seems to be very lucrative.

 

EZ Corp is most heavily based in Texas due to its origins there.  CEO said Texas is one of the most difficult states from a regulatory standpoint.  Goal is to expand from around 1,400 current locations to 5,000, and to expand in all 50 states.

 

EZ Corp now does 10% of its sales online.  EZ Corp is now the largest seller of secondhand goods on Amazon.com.  EZ Corp currently has 50,000+ items available for sale online.  From a standing start 18 months ago of 0 sales online, it has now achieved 10%.  Online sales are a fast growing part of their business.  Other pawn businesses have generally no sales online.

 

UK – Albermarle & Bond (AMB) will most likely be written off.  EZ Corp is committed to their online lending business in the UK (CashGenie) 

 

There have been big regulatory changes in the UK; new regulations that essentially amount to 2,000 pages of regulations.  There is a big pawn store shakeout in the UK.  CEO said most mom and pops will not be able to deal with the new regulations, and even bigger chains are under pressure.  But demand for pawn and lending services is as high as ever in the UK.  My perception – seemed to almost be hinting that they might make another foray into the UK at this time of pessimism; but hard to say

 

CEO discussed “gold headwinds”; said that regardless the big pawn companies will “survive and thrive” as they have the size and scale.  Mom and pops will tend to suffer more.  Mom and pops will also suffer more from regulatory constraints

 

Question was asked about why the stock has performed poorly over the past year.  The CEO answered that it was due to investor's short term thinking; one time charges have hit earnings and investors lack patience.

[Laxputs]

Great notes. Thanks very much for this.

[no_free_lunch]

I like and own the stock but the increase in shares is concerning.  Why would they be thinking about issuing shares at a time where investors are applying "short term thinking".  Shouldn't they be buying back shares right now?  That is the issue with this one, while it's priced great I really do question the management.  If there was better management I would be making this a 20% position but as is I will just hold my shares.

[Rainforesthiker]

I like and own the stock but the increase in shares is concerning.  Why would they be thinking about issuing shares at a time where investors are applying "short term thinking".  Shouldn't they be buying back shares right now?  That is the issue with this one, while it's priced great I really do question the management.  If there was better management I would be making this a 20% position but as is I will just hold my shares.

 

In a recent conference call management said that they were increasing the number of shares just for flexibility, to hold them in reserve and use for future stock options, and that (if I recall correctly) they had no intention of issuing them right now.  Also, apparently they can buy existing mom and pop pawn shops for 5-6x earnings, so that is a great use of their cash.  Having said that, this would be a great time for them to buy back stock.  Also, I agree with you, management is a serious concern.  Quality of management is also limiting the size of my position.

 

Having s

[no_free_lunch]

After a thorough review and analysis of board structure and other corporate governance matters by its Governance Committee, the Board of Directors determined that an independent, non-executive Chairman of the Board was the best choice for the company at this stage of its growth and elected Mr. Love to the position. The board also decided to make the Governance Committee, consisting of independent directors, a permanent board committee. The company now has three permanent independent committees including Compensation and Audit.

..

The company also announced that it will terminate its advisory services arrangement with Madison Park, LLC. Madison Park, a business and financial advisory firm wholly owned by Phillip E. Cohen, the beneficial owner of all of the company's outstanding Class B Voting Common Stock, was engaged to provide advisory services related to EZCORP's business and long term strategic plan through September 2014. The company yesterday delivered a 30-day termination notice to Madison Park, as permitted by the terms of the agreement.

 

In reaching the decision to terminate the advisory services arrangement with Madison Park, both management and the Board considered the valuable advice and counsel Madison Park has provided, but concluded that, in light of the company's current strategic plan as well as its existing capabilities, the Madison Park services are no longer needed.

 

http://finance.yahoo.com/news/ezcorp-names-william-c-love-130000039.html

 

Stock up 7% on the news.  I just can't quite figure out what is happening.  Cohen owns all of the the voting shares and thus controls the company but has terminated an advisory agreement with his own firm?  It is like he is fighting with himself.  Presumably this is to increase investor confidence as many detractors have highlighted the agreement as part of the bear case.  It is a net positive but with him still owning the voting shares.. I don't know, I guess that will boost earnings if nothing else.  What are the boards thoughts on this?

[no_free_lunch]

Just looked it up, the retainer on the agreement was $7.2M a year, so at 10x post-tax earnings this should add $50M to the market cap.

[snow pea]

I contacted the law firm:

 

We are prepared to challenge certain related-party transactions entered into by the Company. In particular, we determined that over the last three years the Company  paid approximately $18 million to Madison Park LLC for advisory services. Madison Park LLC is a business and financial advisory firm wholly owned by Phillip E. Cohen, the beneficial owner of all of the Company's Class B common stock and who has majority voting power in the Company. The purpose of our investigation is to determine whether these payments truly benefit the Company or whether they are designed to simply divert cash to Mr. Cohen.

 

If you own shares you can authorize the firm to proceed on your behalf.

 

Particularly in view of the above, my initial reaction is: is this defensive posturing to try to avoid or minimize potential claims of breach of fiduciary duty?

[APG12]

I contacted the law firm:

 

We are prepared to challenge certain related-party transactions entered into by the Company. In particular, we determined that over the last three years the Company  paid approximately $18 million to Madison Park LLC for advisory services. Madison Park LLC is a business and financial advisory firm wholly owned by Phillip E. Cohen, the beneficial owner of all of the Company's Class B common stock and who has majority voting power in the Company. The purpose of our investigation is to determine whether these payments truly benefit the Company or whether they are designed to simply divert cash to Mr. Cohen.

 

If you own shares you can authorize the firm to proceed on your behalf.

 

Particularly in view of the above, my initial reaction is: is this defensive posturing to try to avoid or minimize potential claims of breach of fiduciary duty?

 

EZPW has had a valuation discount due to the corporate governance. Mr. Cohen just made $6 million on this announcement- essentially his entire annual fee- straight to his bottom line in one day.

[Rainforesthiker]

My take on it:

 

Cohen / Madison Park never did any thing for its advisory fees; this was a way to pay Cohen a cash dividend that no other shareholders were allowed to receive.  Essentially dishonest, and very poor / dishonest corporate governance played along ("whose bread I eat, his song I sing").  Law firm called the corporate execs on this illicit scheme, shined a light on the cockroaches, and they stopped it.  Overall a good thing, but corporate governance remains as a serious flaw in this otherwise undervalued company.   

[APG12]

My take on it:

 

Cohen / Madison Park never did any thing for its advisory fees; this was a way to pay Cohen a cash dividend that no other shareholders were allowed to receive.

 

From what facts are you deriving this conclusion? From the 10-K:

 

"Prior to approval of the extension of the Madison Park agreement and pursuant to our Policy for Review and Evaluation of Related Party Transactions, the Audit Committee of our Board of Directors implemented measures designed to ensure that the extended engagement was considered, analyzed, negotiated and approved objectively. Those measures included the engagement of an independent financial advisory firm to counsel and advise the committee in the course of its consideration and evaluation of the Madison Park relationship and the proposed extension agreement and the receipt of a fairness opinion with respect to the consideration to be paid to Madison Park pursuant to the extension agreement."

 

I mean, I suspect that they weren't entirely earning their fee but to say that they were doing nothing and this was a way to collect a dividend would imply at the very least a blatant disregard of fiduciary responsibility by multiple parties- those on the audit committee and the independent financial advisory firm. I'm not saying it couldn't happen but come on. People get so dramatic about related party agreements.

 

Overall a good thing, but corporate governance remains as a serious flaw in this otherwise undervalued company.   

 

I guess I have a different take on this than most people. This specific situation aside, I'd rather have someone with a sizable stake in control of a company than a group of over-diversified shareholders who can't take the time to understand any of the issues going on. Just look at the way CBRL shareholders have consistently voted against their own interests because the stock price has done well.

[Rainforesthiker]

I guess I have a different take on this than most people. This specific situation aside, I'd rather have someone with a sizable stake in control of a company than a group of over-diversified shareholders who can't take the time to understand any of the issues going on. Just look at the way CBRL shareholders have consistently voted against their own interests because the stock price has done well.

 

 

Are you familiar with the prior fraud litigation involving Cohen and his predecessor company - Friedman's ?

Here is a quote from the Wikipedia article on it:  "It is largely assumed that Friedman’s 2004 bankruptcy was brought about by internal corruption and lack of business ethics by top executives which led to investigations by the United States Department of Justice and the SEC, and a subsequent delisting from the NYSE."

http://en.wikipedia.org/wiki/Friedman's_Inc.

 

Here is a copy of the complaint in a related Friedman's lawsuit:

http://www.whafh.com/modules/case/docs/2748_cid_3_friedmans%20.pdf

A quote from the complaint:  "Both prior to and during the Class Period, Friedman's was one of the companies, along with its affiliates . . . that were entangled in a web of deceit and fraud, all of which was orchestrated by Defendant Phillip E. Cohen, the controlling shareholder . . ."

 

I really don't think this is the type of controlling shareholder you want.

 

Wrt "From what facts are you deriving this conclusion" let's just say I have some good scuttlebutt information.

 

 

[APG12]

Sure, I'm aware of his history and he's pretty slimy. I tried to distance my opinion on controlling shareholders in general from Mr. Cohen:

 

This specific situation aside

 

I agree with you that this isn't who we want running the joint. I just didn't understand how you were concluding that the whole arrangement was a sham but if you've got some good scuttlebutt more power to you!

[Laxputs]

Today the co announced earnings guidance:

 

For the second half of fiscal year 2014, the company expects earnings per share in the range of $0.60 to $0.64 compared to a loss of $(0.57) for the second half last year. On a non-GAAP basis, these expected results represent second half earnings growth of more than 80%. This guidance is in line with the business outlook the company has previously provided. Please see the attached chart for a reconciliation between the company’s non-GAAP and GAAP results and expectations.

 

The company expects earnings per share in the range of $0.20 to $0.22 for the third quarter (ending June 30), and $0.40 to $0.42 for the fourth quarter (ending September 30). On a non-GAAP basis, the fourth quarter expected results compare to $0.09 last year, up over 300%. These results are expected to be driven by improving trends in the company's pawn and financial services loan metrics in the U.S. and Mexico, continued strong retail sales in the U.S., and improving overhead expense trends at the consolidated level.

 

The company estimates that its earnings per share outlook for the fourth quarter of fiscal 2014 may be reduced by $0.02 to $0.03 if it successfully completes the convertible debt offering that was announced simultaneously with this release.

 

http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=9657080&type=HTML&symbol=EZPW&companyName=EZCORP+Inc.&formType=8-K&dateFiled=2014-06-16

 

And with their cash convertible senior notes, they intend to buy back up to 1m of stock privately and pay down debt.

 

The Company intends to use:

•

a portion of the net proceeds from the offering to repurchase up to 1 million shares of its outstanding Class A common stock in privately negotiated transactions, which may be effected through one or more of the initial purchasers of the Convertible Notes or their respective affiliates, concurrently with the consummation of the offering;

•

approximately $115 million of the net proceeds from the offering to repay outstanding borrowings under the Company’s revolving credit facility;

[PatientCheetah]

This is the problem with negative momentum stocks. Even when there is genuine good news, the pops almost always get sold down within a few days - too many bagholders want to get out. I owned some calls. I wish I have understood the magnitude of regulatory change.

[Laxputs]

Really good summary article on EZPW's position. 

 

http://seekingalpha.com/article/2282953-ezcorp-reset-of-expectations-and-new-management-focus-provide-significant-upside

[racemize]

Really good summary article on EZPW's position. 

 

http://seekingalpha.com/article/2282953-ezcorp-reset-of-expectations-and-new-management-focus-provide-significant-upside

 

Quite good article.  However, their estimates for 2014 have to be wrong, given management's guidance of 1.25.  I've left a comment to see what they say.

[Laxputs]

http://www.marketwatch.com/story/voting-shareholder-of-ezcorp-announces-new-leadership-2014-07-18?reflink=MW_news_stmp

[racemize]

http://www.marketwatch.com/story/voting-shareholder-of-ezcorp-announces-new-leadership-2014-07-18?reflink=MW_news_stmp

 

well, that is interesting.

[kevin4u2]

No kidding. I understand Cohen is a character but according to his wiki page he's a Harvard MBA. Can't be that stupid.

 

http://www.marketwatch.com/story/voting-shareholder-of-ezcorp-announces-new-leadership-2014-07-18?reflink=MW_news_stmp

 

well, that is interesting.