Has EZCORP Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if EZCORP (Nasdaq: EZPW  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at EZCORP.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 22.4% Pass
  1-Year Revenue Growth > 12% 17.2% Pass
Margins Gross Margin > 35% 62.1% Pass
  Net Margin > 15% 14.8% Fail
Balance Sheet Debt to Equity < 50% 16.8% Pass
  Current Ratio > 1.3 3.61 Pass
Opportunities Return on Equity > 15% 20.2% Pass
Valuation Normalized P/E < 20 9.02 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at EZCORP last year, the company has kept its seven-point score. But the shares have plunged by a third as threats from regulators have taken their toll on the payday lending industry.

The entire payday lending industry has gone through a lot of turmoil in recent years. With the new Consumer Financial Protection Bureau looking over EZCORP and its competitors, many investors expected much lower profits from that side of the business. It didn't keep Grupo Elektra from buying out Advance America earlier this year, but it does still leave the remaining players with a lot of uncertainty.

In response, many industry players have emphasized other businesses. DFC Global (Nasdaq: DLLR  ) now sports prepaid cards, while Cash America (NYSE: CSH  ) and First Cash Financial (Nasdaq: FCFS  ) have played up their pawn stores as discount retail opportunities. That's also one route EZCORP has taken with its own strong stable of pawn shops.

But part of EZCORP's troubles stem from the decline in gold prices. As gold has fallen, fewer customers are pawning their gold, instead using regular merchandise that is more difficult for EZCORP to convert to cash and which typically fetches lower margins. That forced the company to cut its 2012 earnings outlook back in April.

But even with those challenges, the company is doing a good job of expanding internationally. With stakes in Mexico's Crediamigo and U.K.-based Cash Genie, EZCORP is looking to diversify away from the risks of U.S. regulation.

For EZCORP to improve, it needs to keep boosting margins and then think about whether it can afford a dividend. For now, the company may be better off focusing on its expansion plans rather than returning valuable capital to shareholders.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

EZCORP isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add EZCORP to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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 Fool has a disclosure policy.


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  • Report this Comment On July 16, 2012, at 2:18 PM, rbishnoi wrote:

    Few observations:

    1. Net margin is somewhat inflated because of equity method of accounting used in EZCorp's minority stakes in foreign companies. If you inherit all the line items from minority stake companies, it will bring down net margin by at least few points.

    2. I believe stock is held down because of few other reasons too. 1. dual class share structure with all the voting class held by founder, Mr Cohen. 2. corporate governance & executive compensation (including always increasing retainer to Mr Cohen's firm).

    3. They do have huge opportunity in terms of a large un(under)-banked population in USA, countries with their presence and countries they are not present at the moment.

    4. I also think they will come up with financial innovations to tap this opportunity. Who knows, banking license to retain the funds for longer duration, secularization of their loans (specially pawns) on the lines of credit card ABS, tie ups with government agencies in other countries (just like the setup they have in Mexico via CrediAmigo) which enhances their credit portfolio a great deal.

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