Thursday, January 28, 2010

Pawn Shops Continue to Impress

I highlighted the relative strength in the pawn shop sector about 5 weeks ago [Dec 16, 2009:  Pawn Shops Breaking Out] - despite the recent selloff these stocks are among the best acting stocks in the market. 

Looks like we were about a year early on our thesis with the pawn shops - the "jobless recovery" would do little for many on Main Street.  Or put another way - whatever political influence / fears in this sector (for their cash advance portions of the business) no longer seem to be the issue that they were when the Dems first took over the White House.  Both of the players we are most interested in - EZCORP (EZPW) and First Cash Financial Services (FCFS) - reported in the past week, and shot the lights out.  [please note both these companies have less exposure to the cash advance business versus industry heavyweight Cash America (CSH)]   EZCORP still strikes me as dirt cheap at just over 10x 2010 estimates - I am leaning towards giving it another whirl in the portfolio despite the nice move in the stock of late.  Certainly not a "fast money" sort of stock but hard to pass up this value - for some reason the company is the Rodney Dangerfield of the sector: "No respect".

1) FCFS reported last night:
  • First Cash Financial Services, Inc. today announced record-setting revenue, net income and earnings per share for both the three months and the year ended December 31, 2009. Earnings per share from continuing operations for the fourth quarter were $0.44, an increase of 26% over the prior year, and $1.39 for the year, as the Company's core pawn operations continued to post strong growth in revenue and operating profits.  Fourth quarter revenue increased 26% over the same quarter last year, totaling $111 million.
  • The earnings results for both the quarter and the year were at the top of the range provided in the Company's updated forecast earlier this month, when it raised earnings guidance for continuing operations by $0.05 per share.
  • Same-store revenue increased by 17% for the quarter and 9% year-to-date, on a constant currency basis, in the Company's U.S. and Mexico pawn stores.
  • The Company completed the previously announced sale of its West Coast payday lending and check-cashing operations as part of its ongoing strategy for increasing focus and growth on the Company's core pawn operations. (we like that a lot)  The Company's storefront payday operations have been essentially reduced to only two states, Texas and Illinois, and will represent less than 13% of revenue in 2010.
  • The Company has initiated guidance for its fiscal 2010 earnings from continuing operations at a range of $1.53 to $1.59 per share.  (could be conservative based on recent history of growth)
  • ....sales of scrap jewelry increased significantly during the quarter based on the strength of high transaction volumes and increased gold prices. Growth in pawn service fees continued to reflect strong consumer lending demand in the U.S., where fees were up 23%, and continued expansion into new and developing markets in Mexico, as fees grew by 31%.
2) EZPW reported late last week:
  •  EZCORP's net income for the quarter ended December 31, 2009 increased 73% to $25.7 million ($0.52 per share) compared to $14.8 million ($0.33 per share) for the quarter ended December 31, 2008. Total revenues for the quarter increased 44% over the prior year period to $184.8 million.
  • For our 2010 fiscal year ending September 30th, we are raising our earnings guidance to approximately $1.81 per share, compared to $1.42 per share for fiscal 2009. We remain on track to open 40 to 50 Empeno Facil pawn locations in Mexico and 35 to 45 CASHMAX payday loan stores in Canada, as well as six domestic pawn stores by fiscal year-end."
  • Revenue from jewelry scrapping surged 89 percent, while pawn service segment saw a 55 percent growth.
I think part of First Cash Financial's premium is their significant reduction of payday / cash advance stores - it is probably the closest pure play on pawn shops in the sector after corporate changes in the past 12-18 months.  That said, EZCORP will earn more in 2010 (per guidance from the 2 companies), grow its EPS faster, yet trades for $4 less.

As a larger commentary, the huge (and growing) income disparity in the country, along with the structural problems we speak of every week - especially of the debt and employment kind - continue to make this sector attractive in the long run.  [Nov 29, 2009: NYT - 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps] [Sep 11, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated] Once more, we have a far better reality check about what is happening on Main Street by listening to companies rather than government fluff economic reports.  (remember this when we see fourth quarter GDP hit somewhere between 4-5% and the CNBC anchors high 5 each other). [Dec 15, 2008: The Economic "Recovery"]  The move into Mexico by both companies is also interesting.

No position

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