EZPW - EZCorp

[Ismael]

Gotcha.  Thanks @racemize for clearing that up.  I wonder how the issuance of the convertible debt will affect management’s RSU grants since 20% of their incentive is based upon lowering net debt. 

 

Under the ideal scenario, they use the proceeds to acquire the Mexican pawn businesses they wrote a letter of intent for (and the acquisitions are accretive).  If this pushes the stock up 30 percent the bonds convert to equity, net debt is reduced, EBITDA is increased, and management gets rewarded with an appreciated stock price.

 

It doesn’t sound like management would do a deal that isn’t accretive.  Any thoughts about what management will do with the capital raise if the deal associated with the letter of intent falls through?  A buyback? 

 

From a cursory look, the core business appears fairly stable so as long as the business sticks to its knitting.  I would expect this company to be somewhat counter cyclical.  Any thoughts about revenue growth and profitability if the economy keeps improving?  Is the worst-case scenario, the economy keeps improving causing revenues and/or profitability to suffer?  This sounds like an interesting downside scenario 8 years into a bull market.  Will EZPW’s business do well in a recessionary environment? 

 

It appears like Cohen’s special dividend is out of the picture for the foreseeable future and the special dividend risk is already priced into the stock anyhow.  Any other ideas about the downside potential here?  More looting of inventory?

 

[racemize]

From the various discussions I've had with people associated with EZPW (now and in the past), I don't think a buyback or dividend is ever going to happen.

 

The thesis of this investment pretty much solely relies on expense cutting and/or operating leverage as they increase PLO.  While the economy can have some effect (and yes this is counter cyclical), it will likely be orders of magnitude less important than management executing. 

 

With Joe in as COO, I'm hopeful on that front and believe the current assets should let them make $1.00 per share or more.  However, this $10 conversion price scares the shit out of me, to be honest.  Unless we are protected from them converting and can call it away before they do, I'll be much more likely to exit if we get back over $10 again.  Increasing leverage and diluting equity at low prices just isn't my idea of a good capital allocation decision.

 

Edit: Oh and the downside is that management doesn't execute and/or they make stupid decisions like EZPW has in the past.  I have been hopeful that the new management is different, but I'm questioning that with this new debt deal.  Still need to see the details though.

[Picasso]

With Joe in as COO, I'm hopeful on that front and believe the current assets should let them make $1.00 per share or more.  However, this $10 conversion price scares the shit out of me, to be honest.  Unless we are protected from them converting and can call it away before they do, I'll be much more likely to exit if we get back over $10 again.  Increasing leverage and diluting equity at low prices just isn't my idea of a good capital allocation decision.

 

There are different reasons why issuers like EZCORP have to tap the convertible market versus say a FSFC 5 3/8 of 2024 typical note.  When you factor in all the costs of hedging and so on, it's actually less costly on an all-in basis versus trying to find someone to take down a obscure unrated, unsecured bond deal.  You'd be looking at 12%+ coupon rates.  Especially given where the term loan priced in 2016.

 

I think they got a great deal on these new convertibles.  You can't really fault their capital allocation decision there.  Like someone else mentioned, the real cost is probably around 6% or so which is great.  More important to think about what they'll be buying.

 

One last note; companies that have a hard time in the debt markets (like EZPW) usually stay cheap in the equity markets until they season long enough.  But if you wait until banks lend at better terms then you'll be looking at a $20 stock and the opportunity has long disappeared. 

 

A term loan like this makes me slap on an extra "value trap discount" just to be safe in the equity...

 

Borrowings under the facility bear interest at an annual rate initially equal to the London Interbank Offered Rate (“LIBOR”) plus 7.5% or, at our election, a “Reference Rate” plus 6.5%, but will be reduced to LIBOR plus 6.5% or, at our election, the Reference Rate plus 5.5% upon the later of December 31, 2017 or the occurrence of a specified investment return event. The LIBOR is subject to a floor of 1% and the Reference Rate is subject to a floor of 3%. We pay a monthly fee of 2.75% per annum on the average daily unused portion of the Delayed Draw Term Loan facility and a quarterly loan servicing fee of $15,000. At the time of each draw under the Delayed Draw Term Loan facility, we will pay a funding fee of .875% of the funded Delayed Draw Term Loan.

[racemize]

With Joe in as COO, I'm hopeful on that front and believe the current assets should let them make $1.00 per share or more.  However, this $10 conversion price scares the shit out of me, to be honest.  Unless we are protected from them converting and can call it away before they do, I'll be much more likely to exit if we get back over $10 again.  Increasing leverage and diluting equity at low prices just isn't my idea of a good capital allocation decision.

 

There are different reasons why issuers like EZCORP have to tap the convertible market versus say a FSFC 5 3/8 of 2024 typical note.  When you factor in all the costs of hedging and so on, it's actually less costly on an all-in basis versus trying to find someone to take down a obscure unrated, unsecured bond deal.  You'd be looking at 12%+ coupon rates.  Especially given where the term loan priced in 2016.

 

I think they got a great deal on these new convertibles.  You can't really fault their capital allocation decision there.  Like someone else mentioned, the real cost is probably around 6% or so which is great.  More important to think about what they'll be buying.

 

One last note; companies that have a hard time in the debt markets (like EZPW) usually stay cheap in the equity markets until they season long enough.  But if you wait until banks lend at better terms then you'll be looking at a $20 stock and the opportunity has long disappeared. 

 

A term loan like this makes me slap on an extra "value trap discount" just to be safe in the equity...

 

Borrowings under the facility bear interest at an annual rate initially equal to the London Interbank Offered Rate (“LIBOR”) plus 7.5% or, at our election, a “Reference Rate” plus 6.5%, but will be reduced to LIBOR plus 6.5% or, at our election, the Reference Rate plus 5.5% upon the later of December 31, 2017 or the occurrence of a specified investment return event. The LIBOR is subject to a floor of 1% and the Reference Rate is subject to a floor of 3%. We pay a monthly fee of 2.75% per annum on the average daily unused portion of the Delayed Draw Term Loan facility and a quarterly loan servicing fee of $15,000. At the time of each draw under the Delayed Draw Term Loan facility, we will pay a funding fee of .875% of the funded Delayed Draw Term Loan.

 

I get that it is probably the cheapest thing they could have done, but if the stock is dirt cheap then using Black-Scholes option pricing to get the interest rate doesn't seem too appropriate to me.  In other words, I would say it looks cheap according to modern finance theory, but it looks damn expensive as a value investor.  Even if they can make a good amount of money on the acquisitions (and I think they can) selling cheap to buy cheaper just feels shitty. 

 

Anyway, I'm not arguing against the opportunity.  I've been in this thing from $10 the first time, averaging down all the way to $3, still holding when it was over $12, and back down to this level.  And I've spent more time talking to pawn guys than any other industry I'm invested in, so maybe I'll end up being a pawn expert.  Mostly, I'm just making sure I'm staying honest with myself about what is currently happening. 

[racemize]

Indenture is out.  As I read it, I see virtually no chance that we could call it away before they can convert.  I'd be happy if someone can read it otherwise.

 

http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=11688080&type=HTML&symbol=EZPW&companyName=EZCORP+Inc.&formType=8-K&dateFiled=2017-07-06

[Homestead31]

and no mention of derivatives.  definitely does not seem like an ideal capital raise.

 

that being said, i think judgement must be withheld until we see what any acquisition looks like.  i am generally not a fan of selling cheap stock to buy something even cheaper, but when one factors in that EZPW is under-scaled in mexico/latin america, it is possible that they wind up buying a group of stores for something like 2x EBITDA (including margin expansion from increased scale). 

[Ismael]

What is the probability of management not executing?  From a high level it looks like they have as good of a management team as anyone can realistically expect (in this name).  Does management have much more room for cost reductions at this point?

 

Unfortunately, management is incentivized to increase cash flow without much consideration to dilution.  While management isn’t incentivized to avoid dilution, they talk like they will not make non-accretive acquisitions.  Is the risk here that in an improving macro environment (which is bad for this business) the management will lose its discipline and make non-accretive acquisitions to meet their EBITDA growth targets (to earn their RSUs)? 

 

[DTEJD1997]

Hey all:

 

Earnings are out!

 

Earnings of $.10/share in current quarter vs. a LOSS in the year ago period.

 

Looks like that is about what analysts are expecting.

 

Analysts are expecting earnings of $.14/share in the next reporting period...and earnings of about $.72/share for the upcoming year.

 

Holding a stock with a high P/E like 10 makes me nervous, but who knows?  The stock might get some momentum & growth investors behind it and might even trade for a P/E of 12 or 14!

 

Crazier things have happened!

 

Any body got any input?

[odin]

I've been amazed at their loan growth trends compared to FCFS.  Granted, they stuggled a few years ago and put in a low base, but I'm still impressed.

[Homestead31]

was hoping to see something about the non-binding LOI to buy latin american pawn assets in the release, but no such luck.  if management doesn't talk about this on the call, there will certainly at least be a question or two.

 

while the company is continuing to execute at a high level, in my view what is likely to really drive the stock going forward is if they can return to growth in mexico/latin america.  they are under-scaled, and thus their margins are not where they could be.  a large acquisition could give them the scale to really expand margins, and obviously the top line would grow as well.

[whistlerbumps]

What are people's thoughts about the convertible issue?  To me, it only makes sense if they find a very accretive acquisition with that capital... Otherwise they just sold a ton of stock cheaply for minimal interest savings..... Given the apparent intelligence of the mgmt team, I am surprised they couldn't find a better option...

[DTEJD1997]

What are people's thoughts about the convertible issue?  To me, it only makes sense if they find a very accretive acquisition with that capital... Otherwise they just sold a ton of stock cheaply for minimal interest savings..... Given the apparent intelligence of the mgmt team, I am surprised they couldn't find a better option...

 

The latest convertible issue was certainly not the optimum way to move forward...but this industry is notorious for difficulty in financing.  I also strongly suspect that management has a very specific need for the capital (ie expanding Mexican operations).

 

I would have preferred a different route taken with the financing, but it is not the catastrophe that investors initially thought that it was.

 

These guys should be able to produce better earnings going forward.

 

There was also a very positive VIC writeup on EZPW the other day.

 

One of the few moves I've done correctly lately was topping off my position when the share price crashed on announcement of the convertible.

 

 

[JayGatsby]

Any views on Cash Converters as a standalone entity? (Latest investor pres: http://www.cashconverters.com/Files/Download/1172)

 

Numerically it's pretty cheap, although it has a few different business lines making it more difficult to value. Each on had huge YoY swings with an overall downward trend. The personal finance division seems to generate the bulk of their profit. Based on the loan balance that seems to be largely payday style loans.

[DTEJD1997]

Hey all:

 

Anybody else watching/invested in EZPW?  They've had a bit of a run lately, with shares hitting $10 this AM.

 

There does not appear to be any specific news.  I guess the market has gotten over their financing kerfluffle.

 

They had a nice "slide deck" presentation, outlining future directions for the company.

 

If they can put another good quarterly report, the stock might solidly be over $10.  If that can happen, I will strongly consider writing some more covered calls.

 

Any opinions?

[racemize]

I’ve heard the pawn industry is really struggling and that a good number of pawn stores are on the verge of bankruptcy due to the economy continuing to be pretty good. I think you can see that in FCFS numbers where PLO is decreasing. However, EZPW has been increasing PLO, but I think that is because of how poorly it had been run. With that and the dilution at $10, I sold half. I think it could be worth a lot more, and maybe they have pulled off a huge acquisition in Mexico, but the situation, management’s recent behavior, and the general lower than expected earnings makes me nervous.

[Rainforesthiker]

I once had a sizable position in EZPW - I had continued to average down when the stock was tanking, and my average price was below $6 per share.  Recently I have been selling as the stock got over $9 per share.  I have almost cut my position in half at this point, and I will likely keep selling to get down to a more reasonable position size.  I don't want a large position here at these prices, and given the various potential management issues, dilution, etc.  But I do think there is more potential upside.

[ragnarisapirate]

I’ve heard the pawn industry is really struggling and that a good number of pawn stores are on the verge of bankruptcy due to the economy continuing to be pretty good. I think you can see that in FCFS numbers where PLO is decreasing. However, EZPW has been increasing PLO, but I think that is because of how poorly it had been run. With that and the dilution at $10, I sold half. I think it could be worth a lot more, and maybe they have pulled off a huge acquisition in Mexico, but the situation, management’s recent behavior, and the general lower than expected earnings makes me nervous.

 

If there are struggling shops, the best thing ezpw could do is raise cash to buy them with. Pawn is a fantastic business. Fantastic!

[Homestead31]

 

 

If there are struggling shops, the best thing ezpw could do is raise cash to buy them with. Pawn is a fantastic business. Fantastic!

 

agree - not sure what to say other than while pawn does well through a cycle and I would not consider it a cyclical business, if there is a cycle, the time you want to buy the business (any cyclical business) is at the bottom of the cycle.  With unemployment at record lows, this is the bottom of the cycle (if there is one).

[KJP]

They just closed on the LatAm transaction they've been hinting at for awhile:  http://investors.ezcorp.com/home?item=315 

The transaction adds 112 pawn stores, with the majority (72) in Guatemala; none of them is in Mexico.

 

Last week they also restructured the Grupo Finmart note:  http://investors.ezcorp.com/2017-10-03-EZCORP-Restructures-Repayment-Arrangement-With-AlphaCredit

 

 

 

[DTEJD1997]

They just closed on the LatAm transaction they've been hinting at for awhile:  http://investors.ezcorp.com/home?item=315 

The transaction adds 112 pawn stores, with the majority (72) in Guatemala; none of them is in Mexico.

 

Last week they also restructured the Grupo Finmart note:  http://investors.ezcorp.com/2017-10-03-EZCORP-Restructures-Repayment-Arrangement-With-AlphaCredit

 

A little too soon to tell for sure...but it appears to be a good deal and will significantly expand geographic reach, sales, and earnings of the company.

 

As I and other suspected, they were issuing the debt to make an acquisition.  The debt was expensive, but it well could be that it was "cheap" in comparison to the asset that they got.

 

We will see, but it looks to be a very positive development.

[Homestead31]

Food for thought.

 

EZPW and FCFS are the only players in the pawn market with scale.

 

For the last few years, FCFS has been an aggressive acquirer.

 

For the last few years, EZPW has NOT been an aggressive acquirer b/c they had a whole slew of internal problems to deal with.

 

EZPW has largely moved past their internal problems, and is now once again an acquirer.

 

For the last few years, FCFS had no competition when they were making acquisitions, so they were able to pay lower prices.

 

Now, FCFS has to worry about EZPW, and any future acquisition is likely to be a competitive process, driving up prices.

 

If FCFS bought EZPW - which would require a significant premium based on multiples, massive synergies, and Cohen's control position - it would likely still be worth it to FCFS, because buy paying UP for EZPW, they would be able to pay DOWN for everything else.

 

Not saying it is going to happen tomorrow, but I think it is highly likely FCFS buys EZPW at a fat premium within the next 2-3 years.

[DTEJD1997]

Food for thought.

 

EZPW and FCFS are the only players in the pawn market with scale.

 

For the last few years, FCFS has been an aggressive acquirer.

 

For the last few years, EZPW has NOT been an aggressive acquirer b/c they had a whole slew of internal problems to deal with.

 

EZPW has largely moved past their internal problems, and is now once again an acquirer.

 

For the last few years, FCFS had no competition when they were making acquisitions, so they were able to pay lower prices.

 

Now, FCFS has to worry about EZPW, and any future acquisition is likely to be a competitive process, driving up prices.

 

If FCFS bought EZPW - which would require a significant premium based on multiples, massive synergies, and Cohen's control position - it would likely still be worth it to FCFS, because buy paying UP for EZPW, they would be able to pay DOWN for everything else.

 

Not saying it is going to happen tomorrow, but I think it is highly likely FCFS buys EZPW at a fat premium within the next 2-3 years.

 

A very interesting thought! 

 

Do you happen to know about how many smaller operators are being bought out by FCFS?  If I am not mistaken, has this slowed down recently?  I also wonder what the dollar volume of buyouts has been vs. how much it would cost to buy out EZPW?

 

For example, if they have bought 100 pawn shops and paid $250MM for them...it might not make sense to take out EZPW, as it might cost $750MM to $1BB to acquire EZPW.  That would be simply too much to take out a competing bidder.

 

Of course, they would get all of EZPW's business too.  They would also get some nice Mexican and S. American operations too...

 

If EZPW's latest acquisition works out AND they continue to execute according to plan in the USA, they should be earning $1/share or maybe a bit more in 2 years.  I would imagine that a buyout would have to be at a good premium and I would guess somewhere around $20/share?

 

 

[racemize]

FYI, I've heard of buyouts of U.S. pawn stores at $750k each recently.  Also, with the 25% dilution > $10, I struggle seeing EZPW getting to $1 EPS without a lot of operating leverage coming in.  I decided to sell out as I think it requires a lot of execution, and I'm not happy with the dilution.  They do need scale to get Latin America up to snuff, but they did it at a pretty bad time, stock-wise.  If it drops back down to $7 or $8, I'd be back in.  I can also see this going to $15+ if things go well.

[DTEJD1997]

Hey all:

 

Anybody else besides me & Ragnar watching/owning EZPW?

 

They came out with pretty good earnings today after the market closed.  EPS of $.21/share even with the two hurricanes and the latest quarter traditionally being one of their slower ones.  This earnings was substantially more than even the most bullish analyst predicted.

 

I am going to guess that analysts are going to have to revise their estimates UP for the upcoming year.

 

Making $1/share in the near future does not look like such a stretch now.  If they can do that, the stock is probably undervalued.

 

Finally, also looks like their Mexican division is doing well.

 

Will be interesting to see where the stock opens tomorrow.

[ragnarisapirate]

Hey all:

 

Anybody else besides me & Ragnar watching/owning EZPW?

 

They came out with pretty good earnings today after the market closed.  EPS of $.21/share even with the two hurricanes and the latest quarter traditionally being one of their slower ones.  This earnings was substantially more than even the most bullish analyst predicted.

 

I am going to guess that analysts are going to have to revise their estimates UP for the upcoming year.

 

Making $1/share in the near future does not look like such a stretch now.  If they can do that, the stock is probably undervalued.

 

Finally, also looks like their Mexican division is doing well.

 

Will be interesting to see where the stock opens tomorrow.

 

For what it’s worth, I really like EZPW. Lots of intreresting things going on. Interesting how quickly, the bad governance practices have been forgotten.Neat business. Seemingly cheap price. Even an interesting hedge for a recession.