Chasing Value: EZCorp Still a Bargain

Could it be that potential laws limiting the amount of interest pawn shops can charge are holding back this stock from taking off?

Yoey,

This is the most common explanation I hear and it surely has some merit. However, in reality, it would only affect a portion of the business, a small portion. In addition EZPW has expanded into Canada, Mexico, Australia, Great Britain, South America and continues grow and to diversify. If this is the reason then the concern is greater than the facts.

The lack of a dividend has kept this one off my "must buy" list.

Dan,

The growth rate requires the capital be retained to keep up the expansion without taking on debt. The growth rate is far greater than any dividend. To turn this into a dividend payer all you have to do is sell 2% - 4% of the stock each year and the growth will more than make up for it increasing your equity even with the annual sale of a few shares.

There is probably also a discount applied to the fact that these shares are non-voting.

Alex,

GREAT POINT! Now that may very well have some impact. Most investors probably do not have much of a say anyway -- owning shares in the hundreds, which would be the case for most stocks. However, larger entities might very well shy away from a stock where they cannot have any say, or even vote on board members.

Sheldon,

I share your opinion that EZCorp is a very inexpensive stock based on enterprise value calculation. I am a full time value searcher, and owner of EZCorp also.

However, you write that years have gone by, and you are confounded by inability of the market to price the stock anywhere near its enterprise value, even over long periods of time.

In my opinion this shouldn't confound you. It should encourage you. My belief is that the market is very irrational, and that is a good thing for value investors, for otherwise the search for value would be less productive investment of our time. I usually do not worry about the why and how of irrationality, I just keep calculating enterprise values and comparing to prices. I've been doing this for four years now. In my worst of these four years I beat the market by 10%.

But without thinking about it for more than a minute, I have some suggestions:

1) Pawn shops and pay day lenders are simply unfashionable investments, and it may possibly be the case that they will alway be unfashionable.

2) Some people may not realize that a company operating in or near a market saturation environment can maintain strong per share growth of earnings, in spite of lower corporate growth, as long as the company maintains a strong internal rate of return. (Share buybacks at favorable prices are one way of accomplishing this.) Warren Buffett has pointed out that Coca-Cola has from time to time, been a great investment, even though it saturated the soft drink market something like a hundred years ago. What really counts is; A) Is the company consistently profitable. B) Do those profits benefit the shareholders, either directly, or indirectly; and C) Is the present value of the anticipated stream of profits attractively priced. But people may become distracted by other concerns which are not fundamental to the value investor.