EZCORP (NASDAQ:EZPW) isn't a household name, but its business reaches more and more households every day. The company operates 281 pawn shops and 242 short-term loan centers, charging cash-strapped consumers dizzyingly high interest rates for a quick loan. Business has boomed lately, with sales and earnings growing at double-digit rates. But behind the numbers, management and legislative concerns should give investors pause.
At the company's EZPAWN stores, consumers hand over their watches, DVD players, and/or power tools as collateral for a loan. Typically, the loan is due in 30 days, though the payback period can be extended for an additional fee. Failure to repay the means the borrower forfeits their collateral, which is then resold at the store.
Consumers who don't want to hock their prized possessions for some quick cash can apply for a payday loan at one of the company's 242 EZMONEY stores. Not legal in about half the country, payday loans are unsecured short-term advances that mature before your next pay date -- thus the name. With little more than proof of a job and bank account, a customer can receive up to $1,000 to meet short-term cash needs.
EZCORP charges between $15 and $20 per $100 borrowed. While the company would like its customers to believe that its fees are modest in comparison to overdraft fees or credit card late payments, the reality is quite different. For example, if a person borrowed $100 for 30 days at a fee of $15, that's an annual percentage rate (APR) of 180%. The company will allow the consumer to extend the loan for a couple of periods -- so long as they pay additional fees, making the effective annual rate even higher.
Given the high level of consumer debt, changes in the bankruptcy laws that require higher minimum payments, and the record number of personal bankruptcies, the demand for payday or signature loans has skyrocketed. More than $40 billion in such loans were granted last year alone. EZCORP's most recent quarter reflected these favorable market conditions; the company's net income jumped 37% above the prior-year period, on a 23% rise in revenues.
With macroeconomic conditions expected to remain bullish for the foreseeable future, EZCORP has unsurprisingly upped its guidance for fiscal 2006. It now expects earnings between $1.50 and $1.55 per share, compared to $1.09 in fiscal 2005. Wall Street also projects earnings of $1.86 per share in fiscal 2007.
If you merely look at the earnings numbers and the stock price, you might conclude that EZCORP's shares are cheap. A forward multiple of 13.8 -- and an average annual growth rate of 30%over the next two years -- sure look enticing. However, it shouldn't surprise Foolish investors that a company in the pawnbroking business engages in several business practices that might raise concerns.
First, there is a rather dubious six-figure consulting fee paid monthly to Madison Park LLC, a firm whose sole owner also controls 1.2 million class B voting shares. EZCORP's lack of an independent board should also heighten Fools' caution.
Second, the company wouldn't say how much of this quarter's net income resulted from the sale of old or bad debt. It had no trouble telling us that it sold more than $900,000 of bad debt in the first quarter of 2005, adding four cents to the bottom line. However, according to a research report from Brean Murray, Carret & Co., EZCORP cited confidentiality and competitive factors for keeping quiet this time around. Management's failure to provide disclosure on this front should raise a big red flag for Foolish investors.
Finally, there are the ongoing regulatory concerns of the payday loan business in general. Though the industry has won several recent court battles, the growing consumer outcry against high credit card and loan fees could result in a legislative backlash at any time. This is especially worrisome, given that revenues from the payday business make up an increasingly large percentage of the company's overall total. With plans to open another 115 to 125 EZMONEY shops in 2006, the company's reliance on payday loans for revenue will only increase going forward.
Trading near its all-time high, and at less than 50% of its projected growth rate, EZCORP might seem like a good deal. But when you factor in its dubious management structure and the questions concerning earnings quality and regulatory hurdles, the stock looks like no more of a bargain than one of its payday loans.
Fool contributor Robert Walberg does not own shares in any of the companies mentioned in this article.
