It appears that the better pricing opportunity I was seeking for an entry point into EZCORP (NASDAQ:EZPW) may be coming. The pawnshop operator and payday lender reported second-quarter revenues that, while better than last year, missed projections. Earnings came in on at the high end of estimates, or $0.23 per share.
The worst sin was forecasting third-quarter results that were below expectations. Shares fell as much as 8% in after-hours trading.
Where EZCORP excelled was in advancing its payday-lending side of the business. Revenues there increased 46% even as bad debt improved 1% to 13% of fee revenues. The expected meltdown of all so-called subprime lenders doesn't seem to be extending any further than the mortgage industry. I'll guess that's because someone who needs a $500 cash advance just until his or her next paycheck comes in is not in the same boat as the person unable to come up with a $3,000 monthly mortgage payment.
EZCORP has been expanding the number of EZMONEY cash-advance storefronts at a rapid pace -- a net 29 in the quarter -- and plans to open a total of 100 of them in the fiscal year. Since it's a lighter business model, it makes sense to focus here. But it's not abandoning the pawnshop side of the ledger, either. It opened its second store in Mexico, as the results from the first one were encouraging (with one to two more expected to be added), while EZCORP agreed to buy a chain of 15 stores in Colorado; it anticipates closing on that deal by June.
While the expansion plans may eat into profits initially, thus accounting for the lowered expectations next quarter, operationally it improves the situation for the long run. The need for pawn and payday services continues unabated and helps drive these businesses forward. CEO Joe Rotunda raised EZCORP's guidance for the full year to $0.86 per share, a penny higher than expected at the end of last quarter.
EZCORP has been sporting multiples that put it ahead of competitors Cash America (NYSE:CSH), Advance America (NYSE:AEA), and First Cash Financial (NASDAQ:FCFS). As a result, it's been hard to justify taking a position in the company, even with its growth plans in place. Even as it expands its cash-advance operations, it is up against industry leader Advance America, while First Cash Financial is expanding its buy here/pay here car dealerships. You also have other players entering the field. For example, rent-to-own industry leader Rent-A-Center (NASDAQ:RCII) has begun adding payday-loan services to its shops.
Therefore, the need to continuously broaden its reach will move EZCORP to incur such expenses to meet those challenges. If the market continues to underestimate that need, and the sell-off advances further, then investors may have their chance to take a stake in this business.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
