EZPW - EZCorp

[KJP]

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.

 

I still own this, but I'm always skittish about it because, as ragnar mentioned, the governance issues are still there.  So, while pawn might be an above-average business with above-average growth opportunities, I'm skeptical that EZPW deserves even an average multiple.

[racemize]

I'm out of this recently, but here are my thoughts on the quarter:

 

results look pretty good

Still, adjusting for dilution (which I feel like we ought to be), I don't like the current multiple.  Let's say they can earn $1 a share, after the cuts and whatnot, which I think is potentially optimistic, but a decent estimate in the next 1-3 years.  Assuming $11 per share, they would dilute by about 15 million shares with the new convertibles.  $1 per share is $55 million earnings.  55 million / 70 million shares -> $0.78 per share.  So it's already at 14 P/E with those assumptions, and I think that's 1-2 years forward earnings. 

 

Of course FCFS multiple is insane, so if you put that on this, then it could trade much higher.  Absent the dilution, I probably would still be in this, but that's a huge knock to EPS going forward, and it isn't represented in the reported results.  (And I don't think they are going to pay in cash, even though they should, so there's a possibility for it being a lot better outcome).

[Homestead31]

prior to 2024 for the convert to actually convert the share price has to be above $13.00, which is still 18% higher than it is now ($11).  Further, it is pretty rare for converts to get converted early, b/c there is option value to a convert, and you are giving up that value if you convert early.  I actually think it is unlikely that they will ever convert b/c EZPW is on their way to gushing cash.  They have ~6 years to come up with the cash, which is a long time.

 

FCFS is trading at 16x P/T12M FCFE, which does not strike me as insane for a company that has grown top line at 20% for a decade, is returning cash through dividends and buybacks, and is recession proof.

 

sell side has EZPW at 10 or 11x ~P/normalized FCF.  Sell side coverage of EZPW is also probably the worst I have ever seen, as they fail to give credit for hidden assets,  and focus on earnings when FCF > earnings, and the JeffCo analyst has even made balance sheet mistakes when calculating EV.  Sell side also bases their multiples on "financial services peers" most of which are way worse business, with way more regulatory risk.  Sell side is not paid to "think" though, so it is what it is.

 

you can of course rightfully argue that EZPW deserves a discount to FCFS b/c of the corporate governance issues, but i think that is short sighted.  FCFS would LOVE to own EZPW, and they will probably even tell you that if you ask.  they will tell you that they have regular dialogue.  FCFS has been a growth story b/c the last few years while EZPW has been dealing with their own internal problems, FCFS has been snatching up major players throughout the US, Mexico, Central & South America.  They have been able to pay low prices b/c they were the only buyer.  That has all changed however, b/c EZPW has operating at an extremely high level, and has moved past their problems, and has re-emerged as a potential buyer for all sizable pawn assets.  FCFS now has competition when they never did before.  thinking strategically, FCFS would be complete fools if they didn't try to eliminate their only bid-competition by buying EZPW.  For this reason, EZPW deserves a multiple on par with FCFS, or maybe a turn or 2 lower... but not 5 or 6 turns lower.

 

EZPW can probably do ~115M in EBITDA in a year or 2 (for 2017, the target range was $86.4 to $116.8M, so not a stretch to think they can hit the high end in a year or 2 given the additions in Central America, continued cost cutting, and continued PLO growth) and FCFS can probably realize $35M in synergies.  at 11x (FCFS CSH fairness opinion called for a range of 10-12.5x if memory serves) that gets you to a per share price of something between $25-30 depending on how you think about the convert and cash accumulation/debt paydown.

 

betting on a takeout is not generally an effective strategy, but betting on a recession resistant company trading at ~10 or 11x FCF and below the breakup value of the stores while operating at a very high level, that ALSO has a very good chance of being taken out in the next couple years is better than a stick in the eye in my book.

 

[KJP]

prior to 2024 for the convert to actually convert the share price has to be above $13.00, which is still 18% higher than it is now ($11).  Further, it is pretty rare for converts to get converted early, b/c there is option value to a convert, and you are giving up that value if you convert early.  I actually think it is unlikely that they will ever convert b/c EZPW is on their way to gushing cash.  They have ~6 years to come up with the cash, which is a long time.

 

I don't follow this. As you note, the convert holders wouldn't convert early unless forced to do so by the call feature. (And it may make sense to invoke the call feature to strip the converts of any remaining option value.)  But if the share price is above the conversion price at call or maturity, they will convert and there will be dilution.  So, what do you mean by EZPW has "~6 years to come up with the cash[.]"

 

One way to analyze the company is to build a pro forma balance sheet that converts the 2024s and refinances the 2019s with straight debt (their conversion price is above $16/share), so long as you believe EZPW could issue straight debt by the 2019 maturity, and then run the implied interest on the new debt through a pro forma income statement to see what the implied p/e is under that capital structure. 

 

The other thing you have to account for is the roughly $100 million in cash currently sitting on EZPW's balance sheet.  What are you going to do with that money?  Delever to help with refinancing the 2019s? Make additional acquisitions?  The value that will (or could) be generated by the excess cash isn't being captured by just looking at current p/e.

[KJP]

EZCorp just bought another 21 stores in Sinaloa, Mexico:  http://investors.ezcorp.com/home?item=318

 

No details about the price or current profitability of the stores, other than the statement that the acquisition will be "accretive," which is essentially meaningless given that they're paying in cash that's currently earning around 0% interest. 

[DTEJD1997]

Hey all:

 

Looks like EZPW will hit the $1/share of earnings perhaps even sooner than I thought?

 

They reported earnings of $.23/share today.  This was vs. analysts estimate of $.19/share.

 

This reported quarter also had some problems in the USA, specifically the hurricanes in TX.

 

So all in all, this appears to be very good for owners of EZPW.

 

Should be a lot more information after tomorrow AM's conference call.

 

We will see!

 

[ragnarisapirate]

I really like this company. Agree with DTEJD that they should get around a buck a share soonish. AND they are improving their Latin American stores... When comparing them to FCFS, it’s interesting.

 

I kinda view this company as an improving one in a bull market, that deserves a higher multiple, that also has the built in kicker of “end of the world insurance.” They are based in TX too, which, all things equal, should help their tax paying status relative to other companies, from the deductibility of state taxes.

 

There is just a lot of cool stuff. Love the industry. I think someone on here made a comment about them getting acquired. I am not banking on it, but, this looks like a company that is prepping to sell itself to a serial acquirer (FCFS) in the industry. If not? Who cares. It seems that their governance issues are not what they had been. Never thought that the turnaround would have been like this. It’s pretty amazing that the company was in such bad shape in the last year and a half, and is now where it is!

 

Here’s their newest presentation.

https://s22.q4cdn.com/137492174/files/doc_presentations/Q2FY18-Conference-Call-Slides-Final_050218.pdf

[DTEJD1997]

yo, Yo , YO:

 

Not too many people are watching EZPW, so I'll take that as a good thing.

 

The few analysts are obviously too low on their earnings estimates.

 

I think we get $1/share in earnings this year.

 

The exciting thing could be what will earnings be in the next year (2019)?  Could they go from $1 to $1.25?    That might be a bit optimistic, but we very well could get close.

 

I would think that EZPW very well could trade for a 16 P/E.

 

Got to keep an eye on the share dilution from the convertible bonds...

 

Good things are ahead for EZPW I think!

[ScottHall]

I like American Carnage.

[lathinker]

AUSTIN, Texas--(BUSINESS WIRE)-- EZCORP, Inc. (NASDAQ: EZPW) (the “Company”), a leading provider of pawn loans in the United States and Latin America, announced today that it intends to offer, subject to market conditions and other factors, $100 million aggregate principal amount of convertible senior notes due 2025 (the “Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”). The Company expects to grant an option to the initial purchasers for up to an additional $15 million aggregate principal amount of Convertible Notes. The Convertible Notes are expected to pay interest semiannually and will be convertible into cash, shares of the Company’s Class A common stock or a combination thereof, at the Company’s election, based on a conversion rate to be determined. The Convertible Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. Prior to the close of business on the business day immediately preceding November 1, 2024, the Convertible Notes will be convertible at the option of the holder only upon the occurrence of certain events and during certain periods, and thereafter, at any time prior to the close of business on the business day immediately preceding the maturity date.

 

The Company intends to use the net proceeds from this offering for general corporate purposes and potentially to fund acquisitions. The Company is in various levels of discussion regarding a number of acquisition opportunities in the U.S., Canada, and Latin America, and have entered into non-binding letters of intent to acquire pawnshops in Latin America. At this time, there can be no assurance that the Company will complete any of those potential acquisitions.

 

 

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Does anybody understand why they continue to fund themselves through dilutive convertible bonds? This is not the first time they are using this instrument and like last time, the market is puking on the news. I would expect them to get financing without having to extend convesrion options, so the only way this makes sense to me is that they are trying to redistribute shareholders money to the noteholders - happy to learn of another rationale though.

Also, will be interesting to see who buys the notes...

[racemize]

The CEO doesn't seem to care about the dilution or the cost.  When I asked him about it, he said, basically, "I don't know why you guys are so worried about this, we're just going to roll it." 

 

The last one has been so expensive and is the reason I sold.  They will either have to pay a lot of money (in cash or in new debt) or issue a lot of shares.  If the CEO can't figure out $10 a share was a stupid price for a convertible, I just don't know what to say.  The 8% term loans would have been far cheaper.

 

I would have held this one for a long time, but given these convertibles and the controlling shareholder, I'll forgo the upside.

[KJP]

-----------------------------------------------

Does anybody understand why they continue to fund themselves through dilutive convertible bonds? This is not the first time they are using this instrument and like last time, the market is puking on the news. I would expect them to get financing without having to extend convesrion options, so the only way this makes sense to me is that they are trying to redistribute shareholders money to the noteholders - happy to learn of another rationale though.

Also, will be interesting to see who buys the notes...

 

Has the pricing been disclosed?  Without that, you can't tell how dilutive the converts are (or may be).

[racemize]

-----------------------------------------------

Does anybody understand why they continue to fund themselves through dilutive convertible bonds? This is not the first time they are using this instrument and like last time, the market is puking on the news. I would expect them to get financing without having to extend convesrion options, so the only way this makes sense to me is that they are trying to redistribute shareholders money to the noteholders - happy to learn of another rationale though.

Also, will be interesting to see who buys the notes...

 

Has the pricing been disclosed?  Without that, you can't tell how dilutive the converts are (or may be).

 

It will be based on today's closing price, if it follows the patterns from before.

[ragnarisapirate]

The CEO doesn't seem to care about the dilution or the cost.  When I asked him about it, he said, basically, "I don't know why you guys are so worried about this, we're just going to roll it." 

 

The last one has been so expensive and is the reason I sold.  They will either have to pay a lot of money (in cash or in new debt) or issue a lot of shares.  If the CEO can't figure out $10 a share was a stupid price for a convertible, I just don't know what to say.  The 8% term loans would have been far cheaper.

 

I would have held this one for a long time, but given these convertibles and the controlling shareholder, I'll forgo the upside.

 

Can you go into more detail as to the ceos comments?

[KJP]

$150 million at 2.375%, convertible at $15.90/share.

 

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

[Sunrider]

$150 million at 2.375%, convertible at $15.90/share.

 

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

 

Hmmm - unless I read that wrong, it doesn’t seem as bad as the previous one - low rate and convertible at the company’s option, so not forced/inevitable dilution?

 

[lathinker]

The Convertible Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. Prior to the close of business on the business day immediately preceding November 1, 2024, the Convertible Notes will be convertible at the option of the holder only upon the occurrence of certain events and during certain periods, and thereafter, at any time prior to the close of business on the business day immediately preceding the maturity date.

 

The Company, at its option, may redeem for cash all or any portion of the Convertible Notes on or after May 1, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

 

Sunrider, this reads like the option will be with the holder and only from May 2022, EZPW can somewhat cap the upside. Not sure how the "certain events"/"certain periods" will be specified in the end, but we have to assume that the convertible-holder will have at least a 4y-option.

 

I tried to value a 4-year-call here: http://www.fintools.com/resources/online-calculators/options-calcs/options-calculator/

Assuming a stock price of 13.25$, strike price of 15.90$ and 30% volatility, the call value is about 2.70$ per share which is 170$ per 1000$ of convertible notes.

The worst aspect, in my  view, is that the stock price dropped 10% on the convertible announcement, but the reference price they used for the convertible pricing is AFTER that drop. So, they send their stock price south  first and price the dilutive instrument on that cheaper price in step two.

 

Pricing the call based on the close price just a day earlier would have moved the conversion strike to 17.65 for a 20% premium. Alternatively, you a 15.90$ strike on a 14.70$ stock price give a call value of 3.55$ per share or 224$ per 1000$ of convertible.

 

I cannot see how this is not an (in my view outrageous) wealth transfer from  shareholders to convertible investors and woukd still be interested to learn how is buying these notes.

At this point, I still  own some EZPW shares but it really feels like racemize's conclusion is the way to go here.

 

 

[Sunrider]

The Convertible Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. Prior to the close of business on the business day immediately preceding November 1, 2024, the Convertible Notes will be convertible at the option of the holder only upon the occurrence of certain events and during certain periods, and thereafter, at any time prior to the close of business on the business day immediately preceding the maturity date.

 

The Company, at its option, may redeem for cash all or any portion of the Convertible Notes on or after May 1, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

 

Sunrider, this reads like the option will be with the holder and only from May 2022, EZPW can somewhat cap the upside. Not sure how the "certain events"/"certain periods" will be specified in the end, but we have to assume that the convertible-holder will have at least a 4y-option.

 

I tried to value a 4-year-call here: http://www.fintools.com/resources/online-calculators/options-calcs/options-calculator/

Assuming a stock price of 13.25$, strike price of 15.90$ and 30% volatility, the call value is about 2.70$ per share which is 170$ per 1000$ of convertible notes.

The worst aspect, in my  view, is that the stock price dropped 10% on the convertible announcement, but the reference price they used for the convertible pricing is AFTER that drop. So, they send their stock price south  first and price the dilutive instrument on that cheaper price in step two.

 

Pricing the call based on the close price just a day earlier would have moved the conversion strike to 17.65 for a 20% premium. Alternatively, you a 15.90$ strike on a 14.70$ stock price give a call value of 3.55$ per share or 224$ per 1000$ of convertible.

 

I cannot see how this is not an (in my view outrageous) wealth transfer from  shareholders to convertible investors and woukd still be interested to learn how is buying these notes.

At this point, I still  own some EZPW shares but it really feels like racemize's conclusion is the way to go here.

 

I only read the first part - see below. I agree not ideal and would want to know who bought them. Maybe the sins of the old management team aren't over with this one.

 

USTIN, Texas--(BUSINESS WIRE)-- EZCORP, Inc. (NASDAQ: EZPW) (the “Company”), a leading provider of pawn loans in the United States and Latin America, announced today the pricing of its $150 million aggregate principal amount of convertible senior notes due 2025 (the “Convertible Notes”). The Convertible Notes were offered in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Company granted an option to the initial purchaser for up to an additional $22.5 million aggregate principal amount of Convertible Notes. The Convertible Notes will pay interest semiannually at an annual rate of 2.375% and will be convertible into cash, shares of the Company’s Class A Non-Voting Common Stock (“Class A common stock”) or a combination thereof, at the Company’s election, based on the applicable conversion rate at such time. The Convertible Notes have an initial conversion rate of 62.8931 shares of the Class A common stock per $1,000 principal amount of the Convertible Notes (which is equal to an initial conversion price of approximately $15.90 per share of the Company’s Class A common stock), representing an initial conversion premium of approximately 20% above the closing price of $13.25 per share of the Company’s Class A common stock on May 9, 2018. The conversion rate is subject to adjustment in certain circumstances.

[KJP]

EZ Corp just bought 23 more stores in Mexico for cash:  https://www.sec.gov/Archives/edgar/data/876523/000087652318000038/a2018-q3prestadineroacqex9.htm

[whistlerbumps]

Seems like they are putting that capital to work.  Would be nice if they told us anything about the size of the deals but good that they are accretive and should be synergistic.

[DTEJD1997]

Hey all:

 

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

 

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

 

They are clearly putting the newly raised capital to work.

 

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

 

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

 

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

[DTEJD1997]

Hey all:

 

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

 

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

 

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

 

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

 

The balance sheet strengthened too.

 

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

 

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

 

Oh well....maybe some other time!

 

 

 

 

[CLM5]

Is DTEJD1997 the only person left here holding EZPW?

 

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

 

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

 

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

 

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

 

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

 

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

[racemize]

I sold a while back, but I follow it as I probably know more about this stock than most others.

 

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

 

My issues with the stock are:

1) profitability is really really bad compared to FCFS and historical profit margins.  I don't know why.  My thesis before was that they could get their cost structure right, but I don't see much evidence of it, and I have trouble even seeing them getting to $1.00 EPS soon.  Given these latin american acquisitions, maybe they can get it done in 2 years?

2) Except that these share issuances were horrible.  The CEO told me that "we'll just roll it".  Well, that means the debt load will be really high, unless they do a poor job of growing the company--either one sucks for shareholders.

3) Cohen.

 

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

[Ismael]

I don't understand the heartburn with the converts.  The multiple on the cashflows they are giving is higher than the multiple on the cashflows they are getting.  Sure it would have been better if they could finance the acquisitions with plain vanilla debt, but it doesn't look like that was really an option.