November was a terrible time to own shares of EZCORP (EZPW 3.12%). After announcing earnings per share that fell significantly below analyst expectations, shares of the payday lender/pawn shop operator fell approximately 16.5%. This isn't the only decline the company has been faced with lately, either.
This year alone, shares of the company have fallen 44% as concern about increased regulation by the Consumer Financial Protection Bureau (CFPB) and declining profitability stemming from a fall in gold prices spooked investors.
With this significant disparity between EZCORP and the market, are investors being presented with a good opportunity to buy into the company, or is it too risky?
A countdown to pain?
Between 2009 and 2012, EZCORP has proven itself to be a fast-growing, vastly profitable enterprise. This is demonstrated by the company's ability to grow its revenue by 66% over that time frame from $597 million to $992 million. This means the company has grown its revenue at a rate of approximately 18.4% per year since 2009. This phenomenal growth rate has resulted primarily from a growth in store count and rising commodity prices.
To illustrate the first point, the company saw the number of locations it has increase by roughly 39% from the 910 it had opened at the end of its 2009 fiscal year to the 1,262 it sported as of its most recent fiscal quarter. Cash America International (NYSE: CSH) saw a similar increase, with its number of locations climbing 32% over its past four fiscal years, from 667 to 878. As a result of this increase, Cash America's sales also grew by a comparable 60.7% over the past four years. First Cash Financial Services (FCFS +0.00%), another player in the industry, also increased its locations 39% from 585 four years ago to 814 as of its most recent fiscal quarter; this move saw sales rise by 64%.
Although this growth in both revenue and net income is attractive, it appears as though it has only set the stage for what may prove to be a substantial decline in the company's profitability. The underlying rationale behind this assertion deals with the company's exposure to gold prices.
Even as EZCORP successfully grew to more than 1,000 locations (adding 96 stores year to date) with revenue of more than $1 billion as of September, the company's revenue mix appears to be worsening.
Causes for concern
Year to date, the largest contributor to the company's revenue increase has been additional consumer loan fees, primarily attributable to second-generation loans. Although this may come across as appealing, it means the company could be more heavily affected by stricter regulatory policies aimed at curtailing what the government perceives to be excessively high interest rates.
Over the same time period, the company saw its revenue decline by about 35% in its jewelry scrapping sales as it has been negatively affected by a fall in gold prices.
EZCORP isn't the only company in the industry being harmed by this trend in higher consumer loan fees and lower precious metal prices.
Year to date, Cash America has seen revenue in its consumer loans operations increase by 14.6% as compared to the same period a year ago. Over the same time period, revenue in its disposition of assets business declined by 15%.
First Cash saw something quite different as of its most recent quarterly report, however. While it too experienced a decrease in its scrap jewelry revenue, it also saw a decline in its consumer loans operations due to increased competition. Seeing as how this part of its business makes up less than 8% of revenue, while its pawn stores and merchandising (which have risen 23% and 31%, respectively) are its main focus, I don't see much downside.
Foolish takeaway
It's fairly easy to say that both EZCORP and Cash America would likely be very negatively affected as a result of either a prolonged decline in gold prices or the implementation of unfavorable government regulation. Roughly 20% of the company's revenue is derived from scrapping jewelry which, in turn, has value that is based mostly on the gold it is made from.
If gold prices fall precipitously, sales in this part of the company's business will decline, too, as we've already seen to some degree. On the other hand, any continued downtrend in either of these areas would almost certainly have a minimal impact on First Cash.
It appears that First Cash is the least risky of the three and the company to buy shares of if you believe payday lending is on its way out, or if the long-term price in gold drops lower than what it is today. If you expect a long-term rebound in either of these areas, though, EZCORP or Cash America would make for interesting prospects.
