From coast to coast
EZCORP (NASDAQ:EZPW) has been one of my favorite ways to capitalize on my macroeconomic view of a weakening economy, especially for low-income consumers. Since my last article in November, EZPW stock has been on a tear, returning 45% and leaving the S&P behind. Index 500 in dust (Figure 1).
Figure 1 – EZPW shares are up 45% since November (Seeking Alpha)
Now that the company has recently reported its fiscal 2024 third quarter results, let’s review EZPW’s year-to-date results to determine whether EZCORP is still a buy at this time.
EZCORP continued to post double-digit growth in revenue and earnings as distressed consumers continued to increase their use of home loans to meet their financial needs. Trading at just 10.6x forward price to market, I continue to view EZPW as a countercyclical investment to take advantage of the cost of living and inflation shock. I reiterate my buy rating for EZPW stock.
Brief description of the company
First, for those who are not familiar with the company, EZCORP is one of the largest pawn shops in the United States and Latin America, with more than 1,200 retail stores in 5 countries (Figure 2).
Figure 2 – EZPW Overview (EZPW Investor Presentation)
EZCORP's principal activity is to make “pledge loans” to consumers. Pledge loans are consumer loans that are fully secured by the underlying “pledge” merchandise.
While pawnbrokers are often grouped with payday lenders, as both target struggling consumers, their credit risk profiles are radically different, as pawn loans are fully collateralized and only lend a fraction of the value of the merchandise, while payday loans are non-recourse loans. Credit losses are typically very low for pawn loans.
Historically, the use of pawnbroker services is countercyclical to the economy; low-income consumers tend to turn to pawn loans or payday loans during tough economic times as they struggle to meet their financial obligations (Figure 3).
Figure 3 – Pledge loans are countercyclical (FCFS Investor Presentation)
Readers interested in learning more about the business should read my introduction EZCorp Stock: Tailwinds From A Weak Economy on EZPW.
Review of the third quarter of 2024
EZCORP recently reported strong third quarter and fiscal 2024 results, where the company delivered revenue growth of 10% year-over-year to $281 million and diluted EPS of $0.25 compared to $0.24 in the third quarter of 2023. Year-to-date, EZPW’s revenue was $867 million (+11% year-over-year), while diluted EPS grew 134% year-over-year to $0.89 as 2023 results included a large payback of EZPW’s investment in Cash Converters International (Figure 4).
Figure 4 – EZPW Q3 2024 Financial Summary (EZPW Investor Presentation)
On an adjusted basis, excluding 2023 write-downs, earnings grew a more normalized 15% year-over-year in the third quarter to $0.23 per share (Figure 5).
Figure 5 – EZPW Adjusted Financial Summary for Q3 2024 (EZPW Investor Presentation)
EZCORP continued to see strong demand for its pawnbroking services as pawn loans outstanding (“PLO”), a key performance indicator for EZCORP, grew 15% year-over-year to $265 million, while pawn service charges (“PSC”) grew 14% year-over-year (Figure 6).
Figure 6 – EZPW Key Performance Indicators for Q3 2024 (EZPW Investor Presentation)
EZCORP's Adjusted EBITDA grew faster than revenue, increasing 15% year-over-year as PSC growth outpaced expense growth of 10% year-over-year.
EZCORP’s gross merchandise margin was flat year-over-year at 36%, suggesting the business remained relatively healthy, while inventory turnover dipped to 2.7x. However, aged inventory, another indicator of pawnshop performance, rose 0.9% QoQ to 3.2%, suggesting there is some obsolete merchandise in EZCORP’s stores.
Latin America is the most prominent actor
When analyzing EZCORP’s results, the clear standout performer is the company’s operations in Latin America, as PLO in Latin America grew 30% year-over-year thanks to increasing consumer demand for pawnbrokerage services (Figure 7).
Figure 7 – EZPW Latam PLO grew 30% year-on-year (EZPW Investor Presentation)
Growth in Latin America was due to a combination of higher store counts, higher throughput (i.e., more loans per store), and larger average loan sizes as EZCORP moved into higher-value jewelry lending (Figure 8).
Figure 8 – Overview of EZPW Latam operations (EZPW Investor Presentation)
As expected, EZPW's operations continued to generate solid growth as low-income consumers struggled to make ends meet in the face of the ongoing cost of living crisis.
Valuation continues to look for the cheap
Even though the stock is up more than 45% since November, EZCORP still looks cheap on valuations as the company’s fundamentals have improved over the past year. At 2024 earnings, EZPW is trading at just 10.6x forward P/E, a discount to the financial sector’s 11.5x multiple (Figure 9).
Figure 9 – EZPW continues to select cheap products (Seeking Alpha)
Additionally, unlike banks and other financial institutions that experience declining profits due to higher loan losses when the economy worsens, EZPW's pawnbrokerage business experiences a tailwind when the economy gets tough.
Technical indicators point to historic highs
Technically, the EZPW chart continues to rise within a well-defined uptrend established since the COVID lows in 2020 (Figure 10).
Figure 10 – EZPW chart continues to move up within the uptrend (Author created with price chart from stockcharts.com)
A recent breakout of EZPW stock from a minor downtrend in 2023 suggests that the company is on track to retest the upper end of the ascending channel and the 2018 all-time highs of ~$15/share.
Conclusion
Overall, EZPW's latest quarter results continue to demonstrate how EZCORP's pawnbrokerage business is ideally suited for the current challenging macroeconomic environment as low-income consumers struggle with the cost of living crisis.
I still rate EZPW as buy.