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EZCORP (EZPW) – Fast Growth, Solid Profits, Low Price

November 15, 2009 | About:
EZCorp offers pawn loans in 294 U.S.-based pawn shops and at 38 Mexico pawn shops. The company also sells forfeited collateral from its pawn shop operations. In 477 EZMONEY stores and 71 of its pawn shops, EZPW offers short-term, non-collateralized loans (pay-day loans.)

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HIGHLIGHTS


· EZCORP Inc. (EZPW) reported net income of $20.9 million or $0.42 per share for the fourth quarter, compared to $16.0 million or $0.37 per share in the prior year quarter. Total Revenues for the fourth quarter increased 34% to $164.8 million from $123.4 million in the previous year quarter.

· For the trailing twelve month period ending 09/30/09, EPS was $1.44. Consensus estimate for FY10 is $1.66.

· The company announced that it has completed its acquisition of 108.22 million newly issued ordinary shares of Cash Converters International Limited, headquartered in Perth, Australia. EZCORP paid AUS $0.50 per share, for a total investment of AUS $54.11 million or about US$49.4 million U.S., and now owns about 30% of the outstanding ordinary shares of Cash Converters. The Cash Converters shares are listed on the Australian Stock Exchange and the London Stock Exchange (symbol, "CCVU"). EZCORP funded the investment primarily with cash on hand and expects the investment to be immediately accretive to earnings.

· The PE ratio relative to the average 3-year, 5-year and 7-year EPS growth rate is 0.25X

Analysis of the Balance Sheet

The schedule presented below shows the year-end balance sheets for the years between September 30, 2004 and September 30, 2009. Accounts receivable and inventory comprise approximately 72 percent of the business’s current assets. Approximately 16 percent of current assets are cash. The company reports no short-term investments.

Fixed assets (net property, plant and equipment) make up approximately 24 percent of the business’s non-current assets. As the company’s revenues have increased, the fixed assets also have risen.

Overall, the business’s total assets have approximately tripled during the period presented below. The increase in total assets has been due primarily to increases in accounts receivable and secondarily to increases in inventory and other current assets.

Accounts payable comprise the largest segment of current liabilities. They comprise approximately 70 percent of current liabilities. The company carries a modest amount of short term and long term debt.

As the company’s earnings steadily increased, so did its equity. The company increased equity by approximately 166% during the period presented.

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Analysis of the Income Statement

As part of my analysis, I analyzed EZPW’s income statements for the years ended September 30, 2004 through September 30, 2009.

Revenues have increased from $227.8 million for the year ending September 30, 2004 to $597.5 million in the year ending September 30, 2009. During this period, gross profit margins remained fairly steady ranging from 61.3 percent to 69.5 percent. The result is a near tripling of gross profit dollars for the year ending September 30, 2009 as compared to September 30, 2004.

Operating expenses as a percentage of sales have declined over the years. For the year ending September 30, 2004, operating expenses as a percentage of sales was 93.7 percent. Operating expenses as a percent of sales declined to 83 percent in the year ending September 30, 2009.

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Industry Comparative Analysis

EZCORP is identifies with the Retail (Specialty Non-Apparel) industry group. This is a diverse group of companies operating in very different segments of the service industry. Direct comparisons are difficult.

The following schedule presents a comparative ratio analysis of EZCORP and the median company classified as Retail (Specialty Non-Apparel). Four categories of ratios (profitability, liquidity, debt management and asset management) have been used to compare the operating results of EZPW with that of the industry. EZPW has been compared to the median ratio for the Retail (Specialty Non-Apparel) industry.

Liquidity ratios give an indication of a company’s ability to meet current obligations with the use of current assets. As indicated by the comparative ratio analysis, EZPW liquidity ratios are adequate to meet its current obligations and signify financial strength.

The profitability ratios measure management’s effectiveness in overseeing the business’s resources. Compared to the industry median, EZPW is more effective than the industry in producing earnings from its assets.

All in all, EZPW presents a strong showing when compared to the industry median.

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Summary of Analysis

Based on my analysis of EZCORP, the business appears to be in a strong financial position. During the years presented here, both sales and earnings have increased significantly as well as its equity position. In addition, compared to the industry, EZCORP has more liquidity, less leverage, and operates more profitably. Based on the financial analysis of EZCORP, the business has less risk than does the median company in the Retail (Specialty Non-Apparel) industry.

Value Conclusion

Based on my analysis of the common stock of EZCORP, Inc., I conclude the fair market value of EZPW to be $16.65 per share. This represents a 10X multiple to consensus estimated EPS of $1.66 for FY10 and 11.7X multiple to FY09 EPS of $1.42.

Valuation Ratios
Current Company MA Value Industry Median
Price Earnings 10.20 11.73 14.60
PE to Growth 0.20 0.29 1.30
Price to Book 1.70 1.92 1.60
Price to Sales 1.10 1.37 0.40
Price to Cash Flow 8.50 9.85 12.20
Price to Free Cash Flow 12.20 14.11 8.70



Ronald Sommer

http://measuredapproach.wordpress.com

About the author:

Ronald Sommer
Mr. Hui has been involved in the equity markets since 1980, both on the buy side and the sell side. He is currently semi-retired and living in Vancouver, Canada with his family. He maintains his interests in the markets and advises hedge funds and other clients as a consultant. He is a CFA Charterholder. Check out his investment blog at http://humblestudentofthemarkets.blogspot.com/

Visit Ronald Sommer's Website


Rating: 3.6/5 (7 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago


EZPW looks very good.

I think you're being too conservative on your expectation for only a 10 multiple for your target though.

Actual historical average P/Es [source: Value Line]

2004 ....... 12.6x

2005 ....... 12.3x

2006 ....... 13.2x

2007 ....... 16.2x

2008 ....... 11.1x

10-year median P/E = 14.0x

At 12x the $1.66 estimate for FY 2010 you'd get a target price of $19.99 /share.


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