Pawnshop operator and payday lender EZCORP (NASDAQ:EZPW) will be reporting fourth-quarter earnings today after the market's close. A month ago it gave us updated guidance, boosting its outlook and making it look easy peasy. Can its fulfill that promise?

What analysts say:

  • Buy, sell, or waffle? Of the two analysts that cover EZCORP, one downgraded the company to a hold the day after the renewed guidance was released, while the other has rated it a sell since last year. Ouch! The stock has about tripled in value over that period of time.
  • Revenues. The analysts, though, are expecting 17% growth in revenues to $86 million, while for the full year they anticipate a mere 4% rise to $315 million.
  • Earnings. They did take the earnings guidance to heart, however, and boosted their consensus estimates to $0.62 a share from the $0.45 they had figured before the guidance. That's still at the low end of EZCORP's guidance.

What management says:
Despite the gaggle of interest by regulators and legislators in the payday lending business, EZCORP's primary business is its pawnshops. However, the payday lending side of the company does contribute a lot to overall operating income. In the third quarter it totaled 56%, while in the 2005 fiscal year it amounted to 58%. That's a far cry from 2004, however, when it contributed 73% to operating income.

Management expects the fourth quarter to be strong, because not only did it open 46 new stores in the quarter (and did so pretty much without the usual drag on performance such openings incur), but also because its "signature loans," the payday loans, contributed a lot more to the bottom line, as fewer people defaulted on them. The average payday loan is about $380, with the term of the loan averaging 19 days.

What management does:
Much of EZCORP's gross margins, particularly from sales from its pawnshops, are dependent upon the price of gold. It realizes higher margins on those sales because customers primarily bring their jewelry to the store to receive cash. The jewelry and other merchandise that is brought in is held for the customer as collateral. If the customer cannot make payment on the loan, the collateral is forfeited and EZCORP can then make additional revenues from the sale of the merchandise.

Margins %

6/05

9/05

12/05

3/06

6/06

Gross

58.9

58.7

58.4

58.9

58.9

Op.

10.1

9.8

10.5

12.0

13.1

Net

5.7

5.8

6.2

7.2

7.9
All data courtesy of CapitalIQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
While the payday lending business is an integral component of this pawnshop operator's business, it has carefully chosen the markets into which it opens new stores. Thus, where payday lending rival Advance America (NYSE:AEA) is under a full frontal assault in Pennsylvania -- as regulators seek to drive it out of business there -- EZCORP doesn't have a single store there. It has EZPAWN and EZMONEY stores in 13 states, mostly in the South, and primarily in Texas.

So although it has changed its business model to comply with the recently enacted federal regulations, it is in full compliance with state laws.

EZCORP is trading at 22 times this year's earnings and 20 times next year's. That's a little pricey for the company historically, and even on a price-to-sales basis, it is at the upper end of fair value for the current and following year. While the business of pawn brokering and payday lending does not seem like it's going to be going away anytime soon, EZCORP's run-up over the past year would make me leery about getting in now.

Competitors:

  • First Cash Financial (NASDAQ:FCFS)
  • Cash America (NYSE:CSH)
  • Dollar Financial (NASDAQ:DLLR)
  • QC Holdings (NASDAQ:QCCO)
  • CompuCredit (NASDAQ:CCRT)

Related Foolishness:

Investors in the new Motley Fool CAPS investor intelligence community are gung-ho about EZCORP, with 93% of those rating the company as an "outperform." Are they right, or is the pawn shop operator about to default? Join CAPS and share your perspective today!

Fool contributor Rich Duprey does not own any of the stocks appearing in this article.