Following on the heels of a robust quarter by Cash America (NYSE:CSH), fellow pawnshop operator and payday lender EZCORP (NASDAQ:EZPW) also released results that show how good business can be when the economy tumbles.
With credit markets so tight, analysts say it's natural that pawn shops like those operated by EZCORP, Cash America, and First Cash Financial (NASDAQ:FCFS) will prosper. However, most people using pawn shops aren't likely to tap the credit markets to begin with. With an average pawn loan between $80 and $100, EZCORP's customers probably weren't getting a bank loan anyway.
Yet EZCORP can easily service them, and reap exceptional profits, too. The company was forced to close 11 of its EZMONEY stores in Florida because the state said its fees were usurious, and to settle with Texas over its alleged failure to protect customer information. Yet operating income still jumped 47% this quarter for the pawn side of the business, while payday lending saw a 36% increase.
While the pawn business is definitely growing at a vigorous pace, the payday lending side remains challenged, despite rapid growth in areas where it's still allowed to operate. If politicians, regulators, and consumer advocates continue to hamstring specialty finance firms, EZCORP's bottom line will suffer sooner or later. Advance America (NYSE:AEA), the country's largest payday lender, is already reeling from assaults on the industry, as its earnings announcement the other day showed.
Despite having its payday lending business shown the door in Florida, EZCORP stands to become one of the state's biggest pawnshop operators with its recent acquisition of Value Financial Services. It expects the acquisition to be accretive to 2009's earnings, providing a nice complement to the Jumping Jack Cash stores in Colorado it bought last year.
For both trailing and forward earnings, EZCORP trades at a slight discount to rivals Cash America and First Cash Financial, though it has at least equal growth prospects. That gives the pawnshop operator a very tempting PEG ratio of 0.75, though its enterprise value-to-free cash flow ratio remains lofty. Advance America, World Acceptance (NASDAQ:WRLD), and Dollar Financial (NASDAQ:DLLR) all sport lower valuations than EZCORP. However, as the leading player in the field, I think it's still the best buy out there.
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