EZCORP stock bullish with pawnshops gaining momentum through 2022 (NASDAQ: EZPW)
EZCORP Inc. (EZPW) is a leading pawnshop operator with 1,149 stores in the United States and Latin America. It is a proven business model, with basic pawnshops representing an important form of alternative financing for cash-strapped consumers. Indeed, despite some disruption in the early stages of the pandemic, EZCORP has just released its latest quarterly results, highlighted by strong growth and firming profitability. We believe the company is well positioned to benefit from the current macroeconomic landscape through 2022, defined by high inflation which has put pressure on consumer finances. Trends support higher demand for pawnbrokers while second-hand goods retailing is boosted as an attractive option for value-conscious buyers. We are bullish on EZPW which offers a combination of strong fundamentals and positive long-term growth prospects.
EWPZ Revenue Summary
The company released its fiscal first quarter results on Feb. 2 with GAAP EPS of $0.21, up from $0.08 in the year-ago period. Revenue of $222 million increased 24.4% year-over-year and nearly returned to pre-pandemic levels on a 2-year cumulative basis.
On this point, the real story is the increase in profitability with an operating profit at the highest level dating back to at least 2013. EBITDA of $31.0 million is up from $17.0 million dollars to the period last year. Efforts during the pandemic to streamline operations and generate financial efficiencies are paying off. Total operating expenses as a percentage of revenue at 49.8% is down from 55.8% in the first quarter of fiscal 2021.
Among key financial metrics, PLO outstanding at $177 million was up 20% year-on-year and 16% on a same-store basis. The PLO trend reflects the organic dynamics of the business as it drives the flywheel or revenue into higher pledge service charges (NASDAQ:PSC) as well as sales of goods on confiscated pledge guarantees. Merchandise sales at $138.1 million were a highlight, up 28.1% y/y.
The other takeaway here is that the trends include the pawn segment in Latin America, which accounts for approximately 33% of company-wide operating profit. Net revenues in the Latam region increased 47% year-over-year in the quarter, which was also boosted by the addition of 131 new stores. Same-store PLO in Latin America increased by 20% year-on-year, compared to 15% for the operation in the United States.
The company ended the quarter with $233.3 million in cash and cash equivalents versus $312 million in long-term debt. Given EBITDA or $76 million over the past year, the net debt to EBITDA leverage ratio of around 1x highlights a strong overall balance sheet position, also considering the expectation of increased profits in the future.
Worth mentioning EZCORP CEO Jason Kulas resigned in January due to personal reasons in his decision to join another company. We do not believe that this development has an impact on the company’s growth trajectory. While management is not providing financial guidance for 2022, comments in the press release hinted at optimism that operational and financial momentum will continue. A new loyalty program and online payment options are seen as supporting loyal customers as a positive factor for growth prospects. The company intends to focus on expanding its presence in attractive markets while driving customer engagement as part of its growth strategy.
EZPW Stock Price Prediction
Pawnbrokers are recognized as a relatively counter-cyclical segment that should perform well during an economic downturn as consumers seek to raise cash as a short-term lending option. The central aspect of selling goods and jewelry as collateral for a loan across a nationwide outlet footprint represents a sort of fluke for the business that the emergence of fintech solutions simply cannot replicate. For a significant part of the population and the target clientele of EZCORP, Pawnbrokers provide a useful and even critical service.
One of the challenges in 2020 and early 2021 was the flurry of stimulus measures in the United States, including rising unemployment and out-of-pocket payments during the pandemic, which ended up limiting demand for loans on pledge. Fast forward, and what we are seeing now with record inflation and tighter economic conditions is creating a more positive operating environment for the company.
Although the labor market remains strong, there are concerns that wage growth may not keep up with rising prices. Several other indicators suggest that consumers are being squeezed by high gas prices and declining savings levels. The point here is that 2022 should be good for pawnshops with continued momentum for EZCORP on 2021 trends.
Consensus estimates call for revenue to reach $844 million this year, representing a 16% increase from 2021. EPS is expected to accelerate in a more normalized operating environment to reach a forecast of 0, $65, up from just $0.38 last year. Towards 2023, the market expects mid-single-digit revenue growth, while EPS has further upside as the company continues to improve margins. The bullish case for the stock is that there is an upside to these estimates. The company may also benefit from a weaker dollar as it would add further gain to its international segment.
In terms of valuation, EZPW trades at a 1-year forward P/E of 10x, which is a discount to the company’s average for the ratio over the past decade. We also draw a contrast to comparable pawnshop operator FirstCash, Inc. (FCFS) which trades at a forward P/E closer to 14x. EZPW is also trading at a discount in terms of sales multiples and EBITDA.
One explanation is that FCFS is larger, about twice the size of EZPW in terms of annual revenue, and has generated stronger growth with a more aggressive expansion strategy. Nonetheless, recognizing some key differences between the two companies that have different strategies, we view EZPW as the “value pick” between the two with more upside potential as their valuation gap should narrow in favor EZCORP.
EWPW shares have been volatile, down nearly 30% from a high in late November, but still up around 22% over the past year. We believe the current level represents a new buying opportunity from a solid outlook. We rate EZPW as a buy with a price target for the year ahead of $8.00, which represents a forward P/E of 12.5x on the current EPS 2022 consensus and narrows the valuation gap with FCFS. In our view, EZCORP benefits from strong operational and financial trends and is well positioned to consolidate its market share.
The main risk to consider is the company’s execution of growth initiatives. Weaker than expected results over the next few quarters could open the door to a further drop in the stock. It will be important that margins remain high. Watchpoints include comparable store sales and pawnshop balances with further growth under the upside scenario.