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Why Shares of EZCORP Are Plunging Today

By Lou Whiteman - Oct 8, 2019 at 2:58PM

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The pawn shop operator was downgraded due to corporate governance concerns.

What happened

Shares of EZCORP (EZPW -0.28%) fell more than 12% after the pawn shop operator was downgraded by Jefferies due to corporate governance concerns. The drop continues a difficult year for shares of EZCORP, which are now down more than 30% since Jan. 1.

So what

EZCORP shares fell last month after the company overhauled its board of directors, naming Phillip E. Cohen as executive chairman. In a note out Tuesday, Jefferies analyst John Hecht warns the actions create a "misalignment with non-voting shareholders," noting that Cohen has control of the voting shares in the company.

A man depressed due to a falling stock chart behind him.

Image source: Getty Images.

Hecht isn't against Cohen being involved, noting his extensive industry experience, but said Cohen's history of outside consulting relationships and high pay from EZCORP give him reason for concern. The analyst downgraded EZCORP to hold from buy, slashing his price target to $6.50 from $13.50.

Now what

Governance issues aside, this is an interesting time to operate a pawn shop. The business is under pressure from a range of short-term lenders, including newcomers spurred by fintech innovation.

Of course, in that sort of environment, the larger players have a better chance of surviving than one-shop businesses do. EZCORP owns more than 500 stores in the U.S. and 470 in Latin America, giving it better scale than many of its competitors. And short-term-lending companies and pawn shops should perform well in the event of a recession, which should prompt more demand for quick loans.

Cohen and his experience could be valuable assets to EZCORP as it battles new threats and tries to position itself to take advantage of changing economic conditions. But given the uncertainty of the business and the governance concerns expressed by Jefferies, investors aren't in a mood to hang around and find out.

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