EZPW coverage initiated at Sidoti & Co. with a Neutral Recommendation and a $10 price target.
A Bloomberg article with the CEO of Sidoti, Peter T. Sidoti, discussed the need for the company to change its business model to include a greater amount of "company-sponsored research" where they are paid to produce research on the company in question.
It is unclear that this is the case with their coverage of EZPW and the actual report would indicate this.
I just got a chance to review, in more depth, the Jeffries valuation of EZPW using their sum of the parts (SOTP) analysis.
Jeffries said that the target price of $10.50 is based largely on an 8x EBITDA multiple. They admit that this 8X EBITDA mulitipe is conservative and leaves EZPW at a 30% discount to FCFS. But the Jeffries valuation is even more conservative than it appears at first blush. In their SOTP analysis they COMPLETELY left out the $66.4m that Grupo Finmart buyer still has to pay EZPW. The GF receivable is not a risk (the buyer even paid some principal early last quarter).
If you add in the GF note receivable this is an additional $1.21 per share of value. When added to the Jeffries $10.65 (the actual calculation from Hecht) it gives you an $11.86 target price.
I think the CL King target price of $13 is better than Jeffries $11.86 but at least these two analysts are getting in the rough ball park.
EZPW to present at CL King Conference on 14 September at 11:45 a.m.
There will be a live webcast and slides will be available on the company's investor relations website.
There is an article on Seeking Alpha discussing FCFS -- yahoo won't let me paste the text.
FTM recently pointed out what John Hecht of Jeffries had to say about EZPW. See quote below:
"Shares trade below the historical average on a P/E and EV/EBITDA basis and at a 44% discount to peers on an EV/EBITDA basis. Our $10.50 PT equates to 8x EV/EBITDA, which is still a 30% discount to FCFS."
The 44% discount (and 30% discount at the Jeffries target price of $10.50) is based upon EV/EBITDA. What Hecht didn't point out is that EBITDA numbers from EZPW are going up dramatically and will continue to do so. They have given guidance of lower corporate costs and stable or lower operating costs. Also as they grow PLO by taking market share from FCFS much of that growth will go to the bottom line.
This means that the current 44% discount to peers will be even more pronounced (and illogical) as their EBITDA numbers grow and the being to converge toward FCFS.
Sooner or later Wall Street will begin to take notice that the fastest growing publicly traded pawn shop chain (based upon organic growth) trades at a steep discount to the competitor that it is beating the market place. The stock would have to double from here to not be grossly undervalued.
Sooner or later it will happen...I can wait.
Perhaps Stephens would like to join the party and bump their PT up from $9. I think a significant acquisition would help the cause. 15+ stores would be nice, right? or you guys thinking bigger?
Upside action pre-market with an upgrade from Jefferies,
According to Fly, there is no change in the $10.50 price target.
Jefferies Upgrades EZPW
EZPW (Hecht, Buy, PT $10.5) Upgrade to Buy. We believe the simplified business model to focus on pawn operations have dramatically de-risked the credit profile of the business and note that this business carries low regulatory risk and generates attractive cash flows. In addition, the company has strengthened its B/S with recent capital issuance and improved liquidity while reducing cost of funds. Shares trade below the historical average on a P/E and EV/EBITDA basis and at a 44% discount to peers on an EV/EBITDA basis. Our $10.50 PT equates to 8x EV/EBITDA, which is still a 30% discount to FCFS.
Let's get an upgrade and some acquisition news. Would be nice to hear something from Stephens...they seem to really create some price action.
Just listened to the conference call...the analysts praised them for a nice quarter. I agree.
The biggest take aways are that they really pounded on the theme that they are taking market share from FCFS. It was stressed again and again. The other big thing is that they are seeing opportunities for acquisitions in Latin America at good valuations (Latin American pawn shops focus on jewelry and they believe that their general merchandise expertise can drive good returns in that geography). They wouldn't comment further on the non-binding LOI for a Latin American deal because of an NDA.
Back to valuation (my favorite subject) for a second....their pawn loans outstanding (PLO) per store in the US is an industry high $289k. Pawn M&A metrics show that stores normally go for about 5X PLO plus inventory (some rich deals go for 7X PLO). Using 5X times PLO per US store gives you $1.445m per store. Times 515 stores gives you 744m. Add in inventory of 135m and you get $879m. This $879m valuation gives ZERO value for the Mexican stores. The Mexican stores have PLO of $19m. If you also give them 5X times PLO (maybe low since they are growing so fast) this adds in another $95m for a grand total of $974m.
Their current enterprise value is only about $500m. This means they can almost double in stock price to get to an average valuation for a pawn company of their size.
If they had the same valuation of FCFS, they could go into the low $20s. Kind of interesting in light of the fact that they are taking significant market share from the company valued at about 3X their valuation. Just saying.
Target prices from sell-side analysts are:
Stephens $9 (updated yesterday) with an "equal weight" recommendation
CL King $13 with a Buy updated yesterday
Jefferies $10.50 with a Hold updated on Monday
Blue Tower asked a question about why operating expenses are higher for EZ vs FCFS. Management believes that it isn't a pure apples to apples comparison because of how accounting works, but does say that they have higher labor costs because they invest more in the customer experience.
Also, the company seems to believe the real growth is going to come from Latin America and that's where they are focused now
Bullet 4 on page 3 of their quarterly presentation says...... Product and customer data analytics and recent change in store team incentive (focused on operating contribution at the store level) assisted in delivering improved PLO, net revenue and renewed focus on expense management. Their store level operating expense is still 10 percentage points higher than FCFS but they are making progress. Solid results for sure.
Jefferies upgrades EZPW 10.50 PT.
CL King analyst William Armstrong raised his FY17 earnings estimate to 55 cents by 4 cents. His FY18 estimate was raised by 5 cents to 73 cents.
Analyst #2 yesterday cut his FY17 estimate by a penny to 52 cents. This analyst left his FY18 estimate unchanged at 75 cents
Analyst #3 has estimates of 51 cents for FY17 and 68 cents for FY18.
All three sets of estimates are 'refreshed" (i.e. post-press release).
Nice to see 2.373 million shares trade yesterday and another 1.715 million today.
I'm going out on a limb (I'll probably fall off). My recent prognostications on quarterly results have been admittedly too optimistic but here I go again.
While I beiieve that EZPW is gearing up for a very strong 2018 (starting in 2 months) and is less worried about earnings in the second half of 2017, I've got a feeling the June quarter will be pretty good.
First of all EZPW continues to take market share from FCFS (see PLO growth numbers from EZPW compared to PLO shrinkage from FCFS). At some point these great PLO numbers will start dropping to the bottom line.
This quarter has two other tail winds...one of them is the delayed tax refunds from the US government that hurt the March quarter. These tax refunds will supposedly roll into the June quarter. Also perhaps even more importantly, the Mexican peso has been strengthening against the dollar over the last quarter. This will result in a bump in Mexican revenue and earnings when converted into dollars.
We'll know on Monday after the market closes...fingers crossed.
I forgot to mention the new convert and impact on interest payments. According to Chisum, the new convert with a 2.875% coupon is saving them about $2.2m per year in interest payments despite an addition $50m+ of debt. Some or all of this will undoubtedly be offset by the dilution calculations caused by the convert...however, I'm assuming that John Hecht of Jefferies is right and the convert is either EPS neutral or slightly positive.
Note the new convert is NOT secured and this allows them to do deals that they otherwise couldn't do based upon the prior loan restrictions...in short, M&A activity is no longer constrained.
What really would be nice, is if the convert is used as capital to fund a nice acquisition. If that is the case, the convert (even though expensive capital) will look like a good move on EZPW's part.
17FQ3 Earnings Press Release Comment Thread
Below is an FCFS vs EZPW valuation comparison.
EZPW has an enterprise value of only $507m. EV for EZPW is the $428m market cap plus net debt of ~$79m. (The net debt is calculated by using $195m of old convert plus $143m of the new convert debt minus $120m of cash from the last 10Q plus $54m of cash from the new convert plus $70m due from Grupo Finmart plus an estimate of $15m of new cash from Q3).
FCFS has an enterprise value of $3.06b (market cap of $2.8b plus 260m of net debt).
In short, FCFS has an EV that is almost 6X higher than EZPW. As pointed out in a post of mine from last month, FCFS is roughly 2X to 2.4X bigger than EZPW based on most of the key pawn metrics (e.g. revenue, store count, pawn loans outstanding, inventory, etc. etc). This means that vis-a-vis most metrics FCFS trades at 3X to 2.5X higher than EZPW based on the key metrics. (Note: I understand that FCFS has better EPS and EBITDA but these metrics are beginning to converge).
What makes this 2.5X to 3X delta most confusing is that EZPW has been taking market share from FCFS for a couple of years. See the latest presentation on the EZPW investor relations page where it shows that EZPW has grown pawn loans outstanding by 9% per store over the last 2 years while FCFS has 8% LOWER PLO per store during the same period.
This means that EZPW stock price can go into the high teens or low $20s (with the current store portfolio) and have a valuation that is comparable to FCFS.
People may be scared of the latest convert but as I pointed out in a post from earlier this month the dilution is not that significant and may be easily offset by even one accretive acquisition (this is consistent with what the Jefferies analyst has concluded).
All it is going to take is one or two decent quarters and what I’ve pointed out will become evident to Wall Street…then just watch the stock take off.
Earnings next week 7/31. I like how they're reporting earlier. I don't feel too positive about this qtr, but we shall see. I have a few positions right around this 8 dollar level. Considering taking some off the table just in case.