An EZ Way to Play Gold
Gulab Ram is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Pawn shop operators are a less obvious way to play gold. For these companies, a significant share of revenues comes from the merchandise and scrap sales of gold and other jewelry, so they tend to do better when the price of gold rises. There are three publicly-traded players in this industry: First Cash, EZCORP, and Cash America.
Of the three, First Cash Financial Services (NASDAQ: FCFS) is the purest pawn play. In accordance with its long-term strategic vision to focus on its pawn operations, it has shut down 68 short-term and payday loan locations over the last five years. As a result, over 90% of consolidated revenues last quarter came from pawn sales and loans, and less than 10% came from consumer loan and credit services fees.
First Cash reported Wednesday that scrap jewelry accounted for 8% of gross profit in the third quarter. Selling prices were up 8% year-on-year, but volumes were down 18%, so overall scrap jewelry revenues decreased 12% relative to the third quarter of last year. As the purest pawn play around, First Cash could see an acute impact on its bottom line if the turnaround in gold prices is able to spur gold volumes.
EZCORP (NASDAQ: EZPW) falls between First Cash and Cash America in terms of its reliance on the non-pawn lending business. Roughly 25% of revenues come from consumer loan fees, while roughly 75% of revenues come from its pawn sales and service charges.
Last quarter, EZCORP cited sluggish gold prices as a headwind. According to the company, fewer purchases and forfeitures resulted in a 26% decrease in same-store jewelry scrap sales and a 19% same-store decrease in jewelry merchandise sales. On a same-store basis, it estimated the change in gold price and volume caused a decrease of $6 million in net revenue for the U.S. & Canada segment from the year-over-year quarter.
Looking forward, "[t]he Company expects that, as a result of continuation of recent gold and jewelry trends, earnings for the full year will be at the lower end of its previously announced guidance range of $2.85 to $2.95 per share." If these gold and jewelry trends were to reverse, EZCORP could surprise to the upside. EZPW reports on November 6.
Of the three publicly traded companies, Cash America (NYSE: CSH) is the most dependent on short-term lending, deriving roughly 55% of its revenues from pawn sales and pawn loans, with the remaining 45% coming from consumer loans. This suggests Cash America is relatively less levered to the price of gold, and more tied to potential regulation that might adversely impact its consumer lending business.
This, too, presents an opportunity on which the Foolish investor can capitalize. Specifically, 21 of 51 Senate Democrats, but only 10 of 47 Senate Republicans are up for re-election next month. As a result, the GOP has a good chance to control both Houses of Congress after the election.
Depending on the outcome of the tight Presidential race, this could undermine the ability of the Consumer Financial Protection Bureau, whose chief is up for reappointment next year, to meaningfully disrupt the consumer lending business. Consequently, Cash America still has potential to outperform in the near term without being as correlated to the price of gold. The company reports earnings Thursday, October 25.
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