Thursday, July 24, 2008

Bookkeeping: Cash America (CSH) and EZCORP (EZPW) Both Report Today - Starting Small Stake in EZCORP

I am looking for names hedge funds don't own much of :) So their actions won't ruin our portfolio, errr.. won't ruin our portfolio FURTHER. I think the pawn shops/cash advance areas, aside from being counter cyclical, will fit that bill. Main risks here are legislative, or the economy returns to boom time. Meaning the only risk is legislative ;) We've discussed these names of late - and both that I am targeting report today. Cash America (CSH) this AM, and EZCORP (EZPW) after the close.

I should of bought these when we first identified the trend but frankly this is one sector of the market in 10+ years of equity trading I've never looked that close at, so I had to do more research. These appear to the best of breed. Both are selling off today after big runs, and while I wish to grab either at the 20 day moving average - EZPW @ $16 or CHS @ $39, I'm going to start today. Forward P/Es at current price are 14.5 and 13.4 for the latter, with higher growth rate for former. With valuations so close to each other I'd always rather buy the faster grower. I also like the heavier emphasis on pawn shops over cash advance (the latter having the legislative risk)

Starting a minor stake in EZCorp (EZPW) - just 500 shares to begin in the $17.40s. Hope to add at $16 (20 day moving average), or even better $14.50 (50 day). This gives us a 0.8% starter stake. I'll add on strength (reversal from today's action) or a pullback. Sort of in no man's land now so hence why the small stake. Folks, I double checked the SEC filings and I see no risk statement that has anything to do with production of potash, iron ore, coal, crude oil, natural gas, nickel, wheat, or any sundry commodity. So I hope the hedge funds will leave us in peace on this one.

No surprise on the Cash America earnings since they preannounced... but
  • Cash America International Inc. said Thursday its second-quarter profit jumped 52 percent to top Wall Street expectations, as the pawnshop operator benefited from increased pawn loans and merchandise sales. (no recession here folks, move along)
  • For the three months ended June 30, the company reported net income of $20.1 million, or 67 cents per share, up from $13.2 million, or 43 cents per share, in the year-ago period. Analysts polled by Thomson Financial, on average, expected earnings of 61 cents per share on sales of $238.7 million.
  • Results also beat Cash America's guidance of 62 cents to 64 cents per share, which the company raised from a prior estimate of 51 cents to 54 cents per share earlier this month. (oh the old underpromise overdeliver... I always love a management who knows how to play the Street)
  • Revenue increased 16 percent to $248 million from $213.9 million in the second quarter of last year.
  • Revenue from pawn loans increased 17 percent, while sales of merchandise rose 26 percent.
  • Cash advance fees increased by to $92.8 million from $86.9 million. The company reported a 24 percent increase in cash advance fees from its online channel, which helped offset a slight decline in fees at its stores.
  • "Higher loan demand continued our trend of increased revenue from pawn loans and we experienced better-than-expected retail sales activity during the quarter, partially aided by the tax stimulus payments received by many of our customers," said President and Chief Executive Daniel R. Feehan in a statement. (well I'm glad my tax dollars are hard at work)
Full Year Guidance now Raised
  • Pawnshop operator and cash advance provider Cash America International Inc. on Thursday raised its full-year earnings guidance based on strong results for the first half of the year and expectations for continued demand for its loan products. (hmm everyone told me 2-3-4-5 months ago we'd be in the throes of the "2nd half recovery" by now)
  • The company now expects a profit of between $3 and $3.20 per share, up from a prior estimate of $2.85 to $3 per share. Analysts polled by Thomson Financial, on average, forecast earnings of $3.08 per share. Cash America earned $2.48 per share in fiscal 2007.
  • The planned closings in Ohio are a result of a new state law there that caps payday loan interest at 28 percent, a level that prevents the company from offering the cash advance product profitably.
  • The company also said it expects third-quarter earnings per share of between 62 cents and 66 cents. Analysts expect earnings of 64 cents per share. (I bet this gets raised later in the quarter as the economy "recovers")
But if I believe the pundits once gas goes to $3.00 this whole issue is revolved, the economy booms, homes fly off the proverbial shelf and we coronate Ben Bernanke as our new ruler. Right? Right!

Investor Business Daily chimed in yesterday as they caught the trend - focus on EZCorp (always good to wait for the lemmings who jump in on an IBD mention to jump back out)
  • It doesn't get much better than this for pawnshop operator EZCorp. Tight credit and record food and gas prices have made it tough for a lot of consumers to make ends meet. Many are turning to outfits like EZCorp (NasdaqGS:EZPW - News) to help ease the burden.
  • EZCorp helps strapped consumers with no cash resources or access to credit in a couple of ways. Its 294 pawnshops in the U.S. and 30 in Mexico lend cash in exchange for personal possessions put up for collateral. Its average U.S. pawn loan is $80 to $100.
  • For the growing number of consumers who have tightened their belts, these locales also sell used, forfeited goods at low prices.
  • EZCorp also offers workers short-term advances on their next paychecks, or payday loans, at over 500 locales. The average payday loan is for $445 on a term of 20 days.
  • For 11 straight quarters earnings have soared by at least 21% and sales by at least 14%.
  • "The pawn business is thriving in this environment," analyst Elizabeth Pierce of Roth Capital Partners said. "The credit market is tight, and people are looking for alternative ways to raise cash. One channel is a pawnshop."
  • EZCorp also is seeing merchandise sales rise as consumers look for cheaper alternatives to replace electronic items and other goods.
  • EZCorp's bright forecast comes in the wake of strong second-quarter results. Earnings rose 30% from the prior year to 30 cents a share. Sales jumped 27% to $113.6 million.
  • The pawn business is the big driver. Last year, 73% of revenue came from the U.S. pawn business, Pierce says.
  • EZCorp has 294 U.S. pawnshops operating under the EZPawn name and its 30 stores in Mexico go by Mexico Empeno Facil. It runs 461 EZMoney payday loan sites. It also offers payday loans in 71 EZPawn stores.
  • It operates in 12 states. But over half of its pawnshops and payday loan sites are in the Lone Star state.
  • EZCorp is gaining muscle in the pawnshop business through acquisitions. Most recently, in June, EZCorp agreed to acquire Value Financial Services for $110 million. Value runs 65 pawnshops, 58 of which are in Florida, four in Tennessee and three in Georgia.
  • Once the deal closes, which is expected to occur this month, EZCorp will become Florida's largest pawnshop operator. "Florida is a great state for the pawn business," Pierce said.
  • The state has a big population of service-sector employees, she says. Many are hourly workers, who are often more inclined to use pawnshops. (hey, our whole economy is moving that direction aka service sector baby - might be the birth of a 50 year bull run)
  • EZCorp expects the buy to be accretive to 2009 earnings by 12 cents to 14 cents a share. "It's very accretive," said analyst Dennis Telzrow of Stephens Inc., which seeks an investment banking relationship with EZCorp. "It gives them the ability to grow that business and enter some other markets, maybe in some adjacent states."
  • In another buy, last June, EZCorp paid $23.2 million for 15 pawnshops and one payday loan store from Jumping Jack Cash, a rival in Colorado.
  • Separately, last October it acquired 20 Mexico pawnshops from MMFS International, a subsidiary of Mister Money Holdings. The deal, valued at $15.3 million, gave EZCorp the infrastructure to expand in Mexico, the company says.
  • Separately, in June, EZCorp said it would halt operations in its 11 payday loan stores in Florida. The decision came after the Florida Office of Financial Regulation filed an administrative action against EZCorp. The office alleged that the business model used in its Florida stores violated the state usury law. Rather than continue to battle with the regulatory authorities, EZCorp opted to close the stores, says Telzrow.
  • "I think 20% to 25% earnings per share growth is sustainable for the next three to five years," said Telzrow.
Just have to love that trend in annual revenue, and EPS below - slow and steady staircase up.

[Jul 10: Another Payday Loan/Pawn Shop Breaks Out on Higher Guidance - A Trend Seems to be Afoot]
[Jul 7: Missed Opportunity in Cash America]

Long EZCORP in fund; no personal position (could change in next 24 hours)

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