July 31, 2003 - 1:21pm EST by
2003 2004
Price: 4.82 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 60 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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One of the strongest groups today is the pawnshop industry. An important segment of specialty finance it is estimated to have over 15000 storefronts in the US with the industry growing almost 8% annually. Surprisingly the average income for the pawnshop customer is $34000 which certainly is well above what we would have guessed. Over 70 million of our countrymen have no credit cards or bank accounts and depend on pawn shops to help them sustain day to day life. Indeed a relatively new product-the pay day loan- is exhibiting powerful growth in America and represents an important new growth driver.

EZCORP INC has a presence in 11 states including Texas,Colorado,Oklahoma,Florida etc fielding about 280 stores usually free standing with 5000 square feet. And it does what you would expect it to do- lend money(not much on each loan) on tangible personal property. Incidentally EZPW is second largest pawnshop in industry behind Cash America.

In 2000, a new management team arrived, closed a bunch of stores( over fifty) and set up new procedures to control inventories, bad debts and improved other retailing operations. Initially from sale leaseback of its stores and then subsequently improved operations debt was reduced from about $80 million in 2000 to a recent $33 million in June 2003. Earnings have expanded nicely under the new team. Y/e Sept 2002 printed $0.18, followed by an estimated $0.35-0.40 for Sept 2003. Guidance for the 2003/2004 year is $0.50-0.55 as per management's latest release of July 21.
And that we may add may be on the conservative side.

What has us so excited is their recently expanding payday loans. Company extends about $300 or so for about two weeks collecting a fee of about $18 per $100 of loan. To quickly bring this home lets look at the 2nd qtr 10-q ending March which showed payroll advances of $2.3 million plus advances of 0.4 million totaling $2.7 million invested. For the first half of year the company reported net fee income of $3.4 million (thats after bad debts,direct expenses,Telecheck,call center etc). Annualizing the six month income gives us $6.8 million in net after expense fees for a return of over a staggering 250%. The third quarter reported continued expansion in payroll advances to $3.1 million in qte ending June (no net fee income reported - will wait for 10q) up 75% from last year.

With payroll advances of $3.1 million for 220 stores, we are running about $14,000 per storefront up from $8k y/e 2001. Lets estimate $20k per store y/e 2004/2005 and rolled out to balance of stores resulting in $5.6 million in advances(280 * $20k). Applying our return on capital of 250% results in fee income of $14 million. Now add that to existing cash flow of about $20 million for $34 million. Enterprise value is 55 million equity + $33 million debt less investments of $15 million for $73 million divided by the $34 million for a estimated potential of 2.1 multiple in two years. Or as pat110 would say using $25k per store(not $20k) results in a ebidta of $20 million + $20 million existing for a total potential of $40 million taken at 5 times results in $200 million valuation. Subtracting current debt of $33 million adding investments of $16 mill results in an enterprise value of $183 million or about $15.0 per share - thats a good ways up over next 18 months to two years.
Currently company is testing a stand-alone payday center in Texas and will use their ample cash flow and balance sheet to roll out these stores if a success. Additionally operating from a call center, EZPW will test varying marketing methods to create payday revenue sources from cities where they have no presence. Both approaches would bring in incremental dollars to above projections. As would any new products added to palette of offerings at existing 280 stores. Incidentally, industry average after one year for stand-alone stores is a 40% roi- again over next 1- 2 years.

Other interesting points: free cash flow is about $`12 million or almost $1.00 a share- less than 5 times fcf (competition well over 10). Tangible book value about $8.00. Both First Cash and Cash America sell at more than three times tangible book. At only 1 1/2 times book, EZPW is almost a triple. The balance sheet is strong with current assets of $99 million (about 28% inventory) with current liabilities of under $ 11 million as of June 2003. Additionally company has investment in public London pawn broker- Albemarle & Bond- worth about $15 million, a possible source of funds if needed. Interesting also is fact that Pres. Rotunda who ran G+K Services, left behind in 2000 a company with sales of $577 million revs to take over EZPW with sales of $200 million.

The fast growth coming out of payday loans, the rollout to most of the 280 stores and maturing thereof plus a potential cookie cutter ramp of stand-alone pay-day stores offers potential substantial earnings growth.


1.excellent current values absolutely and relatively.
2.excellent growth potential from relatively new and highly profiteable product.
3.currently no analyst coverage with mgmt probably aiming over months to tell story to street.
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