The Pawn Market and One Company for Your Portfolio
Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hello investors and friendly Fools, today we will take a deeper look at deciding whether to catch a pair of falling knives in EZCORP (NASDAQ: EZPW) and Cash America (NYSE: CSH), or to jump onto the rocket that is First Cash Financial Services (NASDAQ: FCFS). We will start first with a few basic valuations and numbers:
|Company||P/E||FP/E||P/Cash Flow||PEG||Profit Margin||Debt/Equity||5 Yr. Rev. Growth||5 Yr. EPS Growth|
|First Cash Financial||18.9||13.9||15.6||.85||13.5%||26.1||8.5%||16%|
At first glance it is obvious that all three companies have seen some pretty solid, if not great, growth numbers over the last 5 years, but only First Cash Financial Services is priced as though its growth will continue. While they do have a good 16% EPS growth rate for the last 5 years, they are still overshadowed by EZCORP's 26% increase in the same timeframe. Furthermore, First Cash Financial has been unable to grow its revenue as well as EZCORP or Cash America, making its valuation seem a little hefty by comparison. All in all, it appears that EZCORP and Cash America have fallen out of favor in the pawn market despite their tremendous growth prospects.
Where's the Growth?
EZCORP: Stated that it intends to continue growing both the top and bottom lines by 20% as it continues to expand through acquisitions such as Jumpin Jack Cash in Utah, Mr. Money in both Iowa and Wisconsin, Money Mart in Texas, Crediamigo in Mexico, and Cash Genie in the UK, which is an online storefront. The Cash Genie acquisition allows EZCORP to target a global audience and will directly compete with Cash America International's various E-Commerce Platforms in America, the UK, Australia, and Canada. Through this acquisition, EZCORP might be able to jump in on some of the 29% yearly revenue growth Cash America has seen over the last 5 years in its E-Commerce business.
Cash America: Despite this strong revenue growth from its online business, Cash America has slowed its retail services down quite a bit as it has only (yes only) managed 9% yearly growth over the last 4 years. As ridiculous as that sounds it is a slowdown for them as they become more and more dependent on their online business each year.
First Cash Financial Services: Growth has been tremendous as it has acquired 29 stores in Mexico and 44 in the United States. Along with these additions, they have also opened 46 new stores in the two countries and have observed 29% yearly revenue growth in Mexico over the last 5 years. These acquisitions and new store openings represent a 10% storefront expansion which should help them live up to their higher valuations.
Oh Yeah Valuations!
EZCORP is by far the most undervalued by historical means as its P/E of 7.2 and P/Cash Flow of 7 are well below their 5 year averages of 11.7 and 9.4. Not only that, but EZCORP's P/B is only 1.3 which is the lowest it has been since 2004. Much of this can be attributed to the fact that they have whiffed on their last three earnings reports, but it is worth noting that EZCORP didn't miss a beat during the recent recession as both revenues and EPS grew through that timeframe.
Similarly, Cash America is trading at a discount to its historical averages but I do not believe it has near the growth prospects that EZCORP's 20% yearly growth plan does. Meanwhile, First Cash Financial is trading above its 5 year averages as investors wait to see how well their new acquisitions and stores turn out and just how much growth that brings in.
My Foolish Final Words
While First Cash Financial Services may be the more explosive growth story, they had a much harder time handling the recession as their EPS went negative along with revenue growth. Furthermore, they are tied entirely to the United States and Mexico, which leaves very little safety if a slowdown would occur in the pawn industry. As for Cash America, I am intrigued that they pay out a slight dividend, but slowing growth in the retail space will keep me away for now. With geographic diversification on its side, a new online storefront, a largely recession-proof business, and the fact that it trades at an attractive discount to historical valuations, I am going to place a 5+ years green thumb on EZCORP and will keep close tabs on it for my own portfolio.
Fool blogger Josh Kohn-Lindquist does not own any of companies mentioned in this entry, long or short. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Cash Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.