Can EZCORP Survive Another Recession?

With the Dow hovering at the 13,000 level the threat of a recession is palpable, so it would do investors well to consider the impact an extended downturn might have on our portfolios. It might be tempting to move to an all-cash position, but before you make such a hasty move, take the time to look at stocks that have the ability to hold up in tough times.

I used the Motley Fool CAPS supercomputer to look for companies that have proven to be less volatile than the market but have reported strong revenue and earnings growth over the past few years. With a beta of one or less, these companies ought to react less violently to any market swoon.

By adding in a measure of cheapness -- these stocks also carry a P/E ratio that's less than average -- we build in a margin of safety. However, with the CAPS community according them high ratings, we're getting companies that are expected to outperform.

One that floated to the top was top-rated pawnshop operator EZCORP (Nasdaq: EZPW). Even though it's grown revenues at a 17% clip over the last three years and earnings at an even faster 24% rate, its volatility is no worse than the market itself, and it carries an 8.1 market multiple. While that suggests it should do well in another extended downturn, let's take a closer look to see if that theory holds.

EZCORP Snapshot

Source: Motley Fool CAPS screener.

A utilitarian approach
When the economy heads down the tubes, people scramble to scrape together two nickels. Oftentimes that means the jewelry sitting on the bedroom dresser gets sent to a local pawnshop, particularly when the price of gold is soaring.

Two years ago, gold was in the midst of a boom and was hitting record highs on its way to $1,500 an ounce. Despite promises of green shoots and a summer of recovery, families were still finding it tough to get by, and pawnshops like those operated by EZCORP and Fast Cash Financial (Nasdaq: FCFS) were reaping the rewards.

There's gold in those drawers!
The pawn operators make money two ways from jewelry, either from lending money on the value of jewelry pawned, or on sales when someone forfeits the gold necklace or outright sells it to the shop. When gold was regularly making new highs, it was easy for pawnbrokers to make huge profits.

Today, though, the story is a little different: While the economy remains in the toilet, gold prices have flattened or fallen and EZCORP is finding people are redeeming their jewelry at ever higher rates. Last quarter, redemptions hit 86%, and the company experienced 38% fewer sales, causing it to suffer a 19% drop in same-store jewelry sales. Its stock, which was cruising at $34 a share a year ago, has plummeted to $22 today.

Similarly, Cash America (NYSE: CSH) recently cancelled the IPO of its online lending division and warned that full-year results were cooling off. Its stock is down 37% from recent highs, rivaling the drop in EZCORP's stock. It's just not the same lucrative situation for these pawnshop, payday loan lenders.

No payday here
Part of it has to do with the regulatory environment in the U.S. Payday loans -- while never a very good choice as a back-up financial source -- have been harangued by regulators and do-gooders. Advance America was hounded so much it was finally bought out by a Mexican specialty financier, Grupo Elektra.

Mexico, in fact, is one place where business is booming for EZCORP; Great Britain, too. Indeed, international operators don't have the same pall cast over them as domestic ones do, and EZCORP enjoyed revenues that more than doubled in Latin America. Cash Genie in the U.K., which was just acquired in April, contributed $4 million in revenue in the quarter. The promise of EZCORP is in these ancillary businesses: Crediamigo, Cash Genie, Empeno Facil, Albermarle & Bond, and Cash Converters -- which has a reach into 20 different countries -- now account for 20% of the segment's contribution to the total.

Hit or miss
Not everyone is struggling, though. The stock of First Cash is 35% higher from the low point that marked the start of the year, and World Acceptance (Nasdaq: WRLD) has bounced 38% from its 52-week lows. DFC Global is 23% higher.

Operating pawnshops had distinguished EZCORP from its payday rivals when the latter was under regulatory assault, but benefited from the bubble in gold prices. With even marquee-name banks like Wells Fargo (NYSE: WFC) offering payday services and gold in the doldrums, the pawn business has settled into a sort of stasis. But with its enterprise value selling at just 13 times the free cash flow it generates, I still find the pawnshop operator a compelling investment.

Let me know in the comments section below if the promise of gold hitting $2,000 is enough to convince you to pawn your valuables and invest in EZCORP.

Take a recess
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