EZPW - EZCorp

[Homestead31]

interesting - i didn't do any research - i just assumed that with half the book in SPY they were slowly entering the market.

 

hard to think that investors want to pay management fees for ETF exposure. 

[Homestead31]

anyone still paying attention here?  the other day they announced they were delaying their earnings b/c they were looking into some potential issues with a mexican sub.  never feels good to see a delayed earnings, but the mexican sub is a small piece of the business, and the new CEO, who is a very accomplished guy having formerly run a bank in australia,  has been here less than a year, meaning he's probably still rooting out some of the crap that the old management team let slide through the cracks.

 

the history of corporate governance here is troubling, but given new management and the items they've been calling out and addressing, i think there is reason to believe the future will be better than the past.  looking at margins and inventory turns vs. comps, there is a lot of low hanging fruit here to improve profitability, and the company has a long runway to reinvest in their own growth through de novos and M&A as this is a very fragmented industry.

 

the recent regulatory news is out which should remove a hangover, and even if the rules are worse than feared, the 10,000 mom and pops out there are less equipped to handle them than the major players are, so the major players like EZPW will take share going forward.

 

at a time when i don't feel great about the wider market and there are signs that the economy is slowing, i think EZPW is a company that will BENEFIT if the economy really cracks.  in that sense, it is a natural hedge.

[racemize]

Still paying attention.  It is a small piece and the press release also indicated that that sub is growing at double digit pace.  I think (hope) it is an over reaction, but we shall see. 

 

In any event, I don't think it has any relevance on the long-term thesis.  I'm very interested in what the 3rd quarter 3-year plan/guidance will indicate. 

[kevin4u2]

I echo the same sentiment.

 

I held my nose and bought some more on the big down day.

 

Still paying attention.  It is a small piece and the press release also indicated that that sub is growing at double digit pace.  I think (hope) it is an over reaction, but we shall see. 

 

In any event, I don't think it has any relevance on the long-term thesis.  I'm very interested in what the 3rd quarter 3-year plan/guidance will indicate.

[Homestead31]

yes - new management has been vocal that they thought the business went to far toward retail under the new CEO and they were looking to get back to basics.

 

i have to ask - did the old CEO shed any light on the battle in the board room that led to his ouster?  gotta respect a guy who had the balls to cut out the $6M self-dealing payments that the sponsor was funneling to himself...  he must have known he would get fired and done it anyway.. maybe b/c he changed his dismissal bonus a few weeks before.

[Homestead31]

EZPW bringing back the old old CEO as President - North American Pawn.

 

Mr. Rotunda previously served as EZCORP's Chief Executive Officer for 10 years (August 2000 to November 2010).  Under his leadership, the company grew from a few hundred stores operating in 11 states to more than 1,000 owned and operated locations in the U.S., Mexico and Canada, and its market capitalization grew from $17 million to over $1 billion.  During Mr. Rotunda's tenure, EZCORP's growth and performance were recognized with the company's inclusion on Forbes list of "200 Best Small companies" in 2006, Business Weekly's "100 Hot Growth Companies" in 2007, the Association for Corporate Growth's "2010 Outstanding Corporate Growth Award" for Central Texas, and FORTUNE Magazine's 2010 list of "100 Fastest Growing Companies."

 

 

[DTEJD1997]

Hey all:

 

Anybody else been following this?

 

Looks like they are shutting down the payday loan and title loan divisions.  Cutting out a lot of stuff and getting back to basics.

 

If I am not mistaken, a lot of management is going also.

 

Looks like a move in the right direction.

 

Any thoughts?

[Rainforesthiker]

I have been following the situation quite closely, and I recently added significantly to my position when the stock was just above $6 per share.  I have not been posting about it, as there seemed to be very little interest on the Board re this stock in the past.  They have a good pawn business - second largest number (493) of pawn stores in the US; and good cash flow from these stores.  Yes they are completely getting out of all types of payday and auto title lending - they are shutting down their lending business entirely effective last week.

 

I really like what I heard from new management in their recent restructuring announcement; new mangers seem to have a good reputation overall and seem motivated and smart enough to do the right things - focus on their core strength in pawn, get totally out of payday lending, and otherwise reduce costs by simplifying and unifying their back office.  This is exactly what I would have done.  Getting out of payday lending makes a ton of sense and allows them to focus on a good pawn business with much less regulatory issues.  Going forward, I really like their posture in focusing on pawn, cost reduction and a rollup strategy.  Overall, I feel that the pawn business will generate good, growing cash flow.  Downsides remaining are some small amount of regulatory risk and still a bad controlling shareholder.  The upside of regulatory risk is that the small mom-and-pop players will have trouble dealing with this and will likely need to sell out to the big players like EZCorp.

 

In looking at their past issues, most of their wounds were self-inflicted:  buying a gold scrapping business in the UK at the height of a cyclical rise in gold prices; branching out into online lending which really does not work;  doing payday lending - a dying business due to regulatory issues; poor oversight of Grupo Finmart loans, leading to accounting restatements and numerous lawsuits;  and a controlling shareholder with an egregious (now terminated) consulting agreement and numerous management changes.  The controlling shareholder is not going away, but it seems with his Madison Park arrangement terminated now his interests are aligned with the stockholders - he only makes money with a rising stock price. 

 

I think the stock is still quite cheap on a number of metrics (even though it went up about 12% on Friday after their announcement). For example, if you look at recent pawn store acquisitions, In general a pawn store is selling for around $1 to $1.4 million per store (pawn stores are often priced as a multiple of the outstanding loan amount).  They own 493 stores in the US, which should put the value of the company at $500 - $700 million (not even counting Grupo Finmart or their Cash Converters ownership);  but yet their market cap, even after the 12% run-up, is just $388 million.  Also, they are selling around 6 - 7 times free cash flow.  And their cash flow has been somewhat depressed due to falling gold prices.  Now that gold prices have stabilized somewhat, they should do better.

 

Whenever I invest I like to look for a clear rationale as to WHY the market is mispricing the stock - why is the normally wise crowd not getting this right?  Here there has been quite a bet of negative sentiment over the past few years, culminating in a restatement of accounting figures (horrors!) and management changes that understandably caused much uncertainty.  This uncertainty has caused the fairly large price drop - which in actuality is a gift to the value investor.  IMO the accounting issues are relatively minor in the scheme of things.  This type of uncertainty, where the underlying business is sound, is usually what produces the best bargains.

 

[Guest Schwab711]

I know precious metals represent the majority of their txns but do you worry about the significant deflation in most products over the last 1-2 decades? The cost of new (and thus, the value of used) knives, electronics, and tools have been declining fairly quickly, especially relative to historical trends (the most commonly pawned items that aren't gold/silver).

 

What is the largest risk facing EZPW in your view? Should an investor be worried about the potential for a continuation of the slow declines in gold/silver? Will they need to write-off their gold/silver inventory if it drops below weighted-average costs?

 

[racemize]

I know precious metals represent the majority of their txns but do you worry about the significant deflation in most products over the last 1-2 decades? The cost of new (and thus, the value of used) knives, electronics, and tools have been declining fairly quickly, especially relative to historical trends (the most commonly pawned items that aren't gold/silver).

 

What is the largest risk facing EZPW in your view? Should an investor be worried about the potential for a continuation of the slow declines in gold/silver? Will they need to write-off their gold/silver inventory if it drops below weighted-average costs?

 

Inventory turn-over should typically clear out what they hold pretty fast.  Thus, deflation of most products over long time-periods doesn't mean too much, only over short periods.  The same reasoning applies to the gold inventory--declining values are gotten rid of fairly quickly, and they make good margins in a steady pricing environment.  However, the knock-on effect is that the declining gold prices reduce the amount of collateral around for pawning, and therefore reduces the loan amounts.  So while the margin might hold, the revenue and profit declines with the collateral declines. 

[DTEJD1997]

I know precious metals represent the majority of their txns but do you worry about the significant deflation in most products over the last 1-2 decades? The cost of new (and thus, the value of used) knives, electronics, and tools have been declining fairly quickly, especially relative to historical trends (the most commonly pawned items that aren't gold/silver).

 

What is the largest risk facing EZPW in your view? Should an investor be worried about the potential for a continuation of the slow declines in gold/silver? Will they need to write-off their gold/silver inventory if it drops below weighted-average costs?

 

From my limited understanding of Pawn Shops, 85% of items are paid off in full...People don't want to lose their items for the most part.

 

As for the drop in value of gold & silver...that is certainly a concern or issue.  HOWEVER, remember they are not loaning 100% of the value.  EZPW might loan 60% or 70% of it's retail value (less maybe?).  There is a built in margin of safety there.  I also would think that a couple of days after the pawn shop gets title to the item, they should be looking to sell/liquidate it.  They shouldn't be sitting on this stuff for months or years. 

 

I don't think that is the problem....

 

What could go wrong?

 

Very intense competition!  I lived in area of TX that must have had 1 pawn shop for every 7,500 residents!  There were some strip malls that had a pawn shop & title loan & pay day lender in it!

 

Texas has a very different culture than the rest of the USA.  Pawn shops operate as a "bank" for those that are "un-banked".  I suspect the number of "un-banked" will continue to grow in the future.

 

When I was a small child growing up in Detroit, there were several pawn shops...but this was for a city of 1.5 million.  Maybe 10 shops?  Now there might 30 shops!  Lots of room for expansion in the midwest.

 

There are also operational problems...Pawn shops (chains) pay their lower level employees not much more than minimum wage.  How are you going to get good workers for that wage?  A good pawn shop employee has to be honest, dependable, able to quickly do basic math, personable and be able to show some empathy for their customers.  How are you going to get that for $9/hour?

 

Ebay could also be a competitor...BUT you still need to work to list an item, and there is no gaurantee that you will make a sale.  So if you need cash in a 24 hr. period, a pawn shop might be your best bet.

 

Another threat is that if the economy significantly improves, the demand for them will go down.

 

Overall, I think a pawnshop is the best of the "dirty" high interest loan originators.

 

A good business to be sure.

[Rainforesthiker]

I know precious metals represent the majority of their txns but do you worry about the significant deflation in most products over the last 1-2 decades? The cost of new (and thus, the value of used) knives, electronics, and tools have been declining fairly quickly, especially relative to historical trends (the most commonly pawned items that aren't gold/silver).

 

What is the largest risk facing EZPW in your view? Should an investor be worried about the potential for a continuation of the slow declines in gold/silver? Will they need to write-off their gold/silver inventory if it drops below weighted-average costs?

 

With the decline in gold prices, the mix of items pawn shops take in has transitioned a bit to less gold/silver and more non-jewelry items such as electronics.  This has hurt their margins a bit for sure as these items depreciate faster than jewelry, but they can certainly ameliorate this a bit by changing their loan ratios or doing more conservative appraisals.  Thus I think they should be able to manage this, and when gold stabilizes and begins increasing this trend should reverse. 

 

The biggest risks facing EZPW in my view are:

 

1) The control shareholder doing things that hurt the company or are not in the shareholder's interest, such as attempting to get paid a large consulting fee or making management changes for the wrong reasons. 

2)  The CFPB taking a negative regulatory stance against the pawn industry.  This is a possibility, but I think the CFPB is mainly concerned with payday lending, as payday lending tends to put people in a cycle of debt, whereas pawn does not as the person can always simply walk away and only lose his collateral.

3)  gold prices continue to decline.  Certainly gold prices can't decline forever.  They have already seen a significant drop, and the nature of the cycle would tend to indicate that gold will stabilize and most likely rise again in the near future.

 

The other thing to mention, which I no longer consider a risk, is that management would keep doing stupid things with their capital; but the new management has IMO made the right call to simplify their business and focus on what they know and do best, which is pawn.  The plan management has put forward involves reducing cost structure and focusing on using their capital for roll-ups, which what they should be doing with their cash.

[ritrading]

I have been following the situation quite closely, and I recently added significantly to my position when the stock was just above $6 per share.

 

Rainforesthiker - don't mean to single you out, but I don't want to see you lose your money.

 

I've researched EZPW about a year ago, and the situation doesn't look like it has changed. Phillip E Cohen owns all of the Class B Voting common shares. If you check the related party transaction sections, he forces EZPW to employ "consulting services" from entities which are owned by himself. The stock does not pay a dividend. This is his way of pulling all the profits out of the company and into his own pockets without sharing with other investors. Since he has all the voting power, he has historically voted out board members which try to stop him from doing this. This is a company that no one other than Cohen should be in. It is completely designed to enrich him and him only.

 

Last I checked, EZPW was at no risk of collapsing. They are a real business and does make money. However, don't expect to get any of the profits. It wouldn't be wise to short it either. Since the fees that Cohen pulls out are just expenses on the income statement, he can effectively control the net income by taking less next year.

 

http://www.renaissanceinvestor.com/2014/08/case-study-ezpw-beautifully-deceptive.html

[krazeenyc]

I have been following the situation quite closely, and I recently added significantly to my position when the stock was just above $6 per share.

 

Rainforesthiker - don't mean to single you out, but I don't want to see you lose your money.

 

I've researched EZPW about a year ago, and the situation doesn't look like it has changed. Phillip E Cohen owns all of the Class B Voting common shares. If you check the related party transaction sections, he forces EZPW to employ "consulting services" from entities which are owned by himself. The stock does not pay a dividend. This is his way of pulling all the profits out of the company and into his own pockets without sharing with other investors. Since he has all the voting power, he has historically voted out board members which try to stop him from doing this. This is a company that no one other than Cohen should be in. It is completely designed to enrich him and him only.

 

Last I checked, EZPW was at no risk of collapsing. They are a real business and does make money. However, don't expect to get any of the profits. It wouldn't be wise to short it either. Since the fees that Cohen pulls out are just expenses on the income statement, he can effectively control the net income by taking less next year.

 

http://www.renaissanceinvestor.com/2014/08/case-study-ezpw-beautifully-deceptive.html

FYI the consulting agreement was eliminated.

[ritrading]

FYI the consulting agreement was eliminated.

 

Hmm I found some eliminated agreements in the more recent 10-Q's. But hasn't this happened before? I'm having some trouble remembering my research, but hasn't prior directors tried to end these agreements and then Cohen just votes them out? Once they're gone, Cohen can re-establish the agreements or find a new board that will.

[Rainforesthiker]

I have been following the situation quite closely, and I recently added significantly to my position when the stock was just above $6 per share.

 

Rainforesthiker - don't mean to single you out, but I don't want to see you lose your money.

 

I've researched EZPW about a year ago, and the situation doesn't look like it has changed. Phillip E Cohen owns all of the Class B Voting common shares. If you check the related party transaction sections, he forces EZPW to employ "consulting services" from entities which are owned by himself. The stock does not pay a dividend. This is his way of pulling all the profits out of the company and into his own pockets without sharing with other investors. Since he has all the voting power, he has historically voted out board members which try to stop him from doing this. This is a company that no one other than Cohen should be in. It is completely designed to enrich him and him only.

 

Last I checked, EZPW was at no risk of collapsing. They are a real business and does make money. However, don't expect to get any of the profits. It wouldn't be wise to short it either. Since the fees that Cohen pulls out are just expenses on the income statement, he can effectively control the net income by taking less next year.

 

http://www.renaissanceinvestor.com/2014/08/case-study-ezpw-beautifully-deceptive.html

FYI the consulting agreement was eliminated.

 

I certainly don't mind being singled out.  If someone thinks I am doing something dumb I would rather know about it as soon as possible.  When investing, it is best to check your ego at the door.

 

I am well aware of the arguments you raise - some are still valid and some are out of date.

 

The Madison Park consulting agreement was terminated a good while ago.  A shareholder class action lawsuit was brought against the company for the purpose of ending this agreement.  Given that, I seriously doubt that the consulting agreement can or will be revived - there is just too much risk.  There is a new consulting agreement with a pal of Cohen's, but it is very very small, and I believe new management addressed this very satisfactorily in the recent call.  Also note that EZPW has traded at a much higher share price with the Madison Park agreement in place (as high as $30), so I don't think that agreement in and of itself is a barrier to an improved stock price.  I do understand the risks and to some extent am holding my nose wrt Cohen and his management oversight.  But the extremely low share price (driven mostly by a large amount of uncertainty related to their Mexico accounting / management issues) is quite attractive.  Even without a dividend, I believe that they will steadily increase their intrinsic value, and hence their ability to pay a dividend in the future.  Also, without the consulting agreement, I believe Cohen's interest is aligned with other shareholders - we should both only gain with a rising stock price.  Further, the new management has an incentive structure such that a large part of their incentive compensation kicks in when the stock price exceeds $15/share, and thus I think the new management's incentives are in the right place.  The "ugliness" you rightfully identify in the management is a two edged sword - on one hand it makes the company less desirable as an investment (when you ignore price), but on the other hand it creates the opportunity for a huge price drop that is far less than my estimation of intrinsic value.  We'll see what happens.

[JayGatsby]

Financials were due today, no?

[racemize]

They are up now, through Q3.

[JayGatsby]

Seems like everything held together pretty well. Good cash flow. Looks like something related to the restatment increased the non-recourse grupo debt balances. I guess they'll hold a call when they publish the next quarter? The real test will be what they choose to do with the cash. I remember on the last call someone asked if they'd buy back shares considering the current price and they were clearly more interested in growing the  business than the share price.

[JayGatsby]

Here's how I'm looking at this. Figured I'd lay it out for anyone not following the situation or for anyone following the situation to tell me where my analysis is wrong.

 

9 Mos June Earnings from US operations before tax, D&A and impairment: $89.6M (Note that this includes the non-pawn business that they're exiting)

9 Mos Corporate Earnings before tax, D&A and restructing (including interest expense): $44.2M

9 Mos Net earnings excluding Latam: $45.4

Annualized (divided by 3/4): $60.5 (June quarter was below this. Unclear how much of that was due to the consumer loan biz that they're exiting)

 

Total Recourse Debt (ie, ex Latam): $215M

Market Cap: $294.5

Less: Cash: $114.4M (as of June 30)

Less: Equity interest in Cash Converters: $90.4M

= Net Enterprise Value of US operations: $304.7

 

So that puts the US operations at ~5x pre-tax earnings. You're also buying their pawn loan book and inventory (~$200M net of current liabilities) and you're also buying the Mexico operation (Grupo Finmart). It doesn't seem to generate much profit, but the Company just increased their stake in the subsidiary by 18% at a cost of $29M. This implies an equity value of $161M for the operation.

 

 

[DTEJD1997]

Hey all:

 

Couple of developments here....

 

A). Management is of such high quality & of course there is tightness in today's labor market...SO MANAGEMENT BONUSES HAD TO GET PAID!!!!!!!  WTF?  is the BOD a gathering of simpletons?  These people are lucky to have their jobs at all!  Example #782,934 of management capture of corporations.

 

B). To add insult to injury, they now can't get their financials released on time and need a few more weeks!  This isn't rocket surgery!  Did the due date sneak up on them?  Did they get confused?  What the hell is going on?

 

Of course, the stock price has collapsed further.

 

Looks like I may have been wrong on this.  I have little faith in management at this point.

 

Any thoughts?

[Spekulatius]

I think yo name red the question yourself. Sell the stock, if not for any other reason than harvesting a tax loss. This is not a business where you can overlook management's lack of  integrity.

[racemize]

Hey all:

 

Couple of developments here....

 

A). Management is of such high quality & of course there is tightness in today's labor market...SO MANAGEMENT BONUSES HAD TO GET PAID!!!!!!!  WTF?  is the BOD a gathering of simpletons?  These people are lucky to have their jobs at all!  Example #782,934 of management capture of corporations.

 

Yes, shitty, but not unexpected.  This one makes more sense than the one they did a couple of years ago in my opinion.  The new management had to come in and do a lot of house cleaning, so the poor results aren't the result of their actions.  That being said, this is of course egregious and I completely disagree with the payouts at this particular time. 

 

I think there is a distinction to be made between the controlling shareholder structure (which is awful) and management, which has changed quite a bit in the last year or so.  We've been hearing good things about the new management from a variety of sources.

 

B). To add insult to injury, they now can't get their financials released on time and need a few more weeks!  This isn't rocket surgery!  Did the due date sneak up on them?  Did they get confused?  What the hell is going on?

 

It's only a 15 day delay, so I don't view this as material really.  I think their explanation that the restatement really killed them is likely true, even if disappointing.

 

Of course, the stock price has collapsed further.

 

Looks like I may have been wrong on this.  I have little faith in management at this point.

 

Any thoughts?

 

It continues to be ugly.  But I continue to believe that there is value here.  They are almost pure play pawn and even pawn businesses run in an average way makes money.  To me, this feels similar to BAC when it dropped down to $5.  Once the stink clears, the business should be worth quite a bit more, I think pretty easily $12+. 

 

[kevin4u2]

 

It continues to be ugly.  But I continue to believe that there is value here.  They are almost pure play pawn and even pawn businesses run in an average way makes money.  To me, this feels similar to BAC when it dropped down to $5.  Once the stink clears, the business should be worth quite a bit more, I think pretty easily $12+.

 

I agree.  At the current price this one represents easy value.  The company has and continue to make money.  I don't doubt there is growing frustration out there, so the point of maximum pessimism may be right around the corner.  The current price is 3.6x consensus EPS for next year. 

[ritrading]

It continues to be ugly.  But I continue to believe that there is value here.  They are almost pure play pawn and even pawn businesses run in an average way makes money.  To me, this feels similar to BAC when it dropped down to $5.  Once the stink clears, the business should be worth quite a bit more, I think pretty easily $12+.

 

Mentioned this a long time ago in this thread, but EZPW is a trap. There is 0 value in this company. The founder owns all the voting shares, and has in the past acted in ways to enhance his own wealth at the expense of shareholders. Example - founder forces EZPW to purchase "consulting" services from him. With no dividends or repurchases being made, these "consulting" services is the only way that profits leave the company into the hands of the owners. He does it in a way where he is the only one who will ever see any profit from EZPW. He has a history of firing management who challenges him.

 

To reiterate, this company is worth zero in the hands of anyone other than the founder. He is the only one who can extract value from it. If you're holding the A shares, do yourself a favor and take the loss.