UNIVERSITY OF OREGON INVESTMENT GROUP 5/25/2011 Financials EZCORP INC. SELL Stock Data Valuation (per share) Summary Financials Covering Analyst: Aia Tulepbergenova Email: aigerimt@uoregon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG s portfolio. In addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG s portfolio.
BUSINESS OVERVIEW EZCORP is a leading provider of specialty consumer financial services. The company provides collateralized non-recourse loans, commonly known as pawn loans, and a variety of short-term consumer loans, including payday loans, installment loans and auto title loans, or fee-based credit services to customers seeking loans. At its pawn stores, the company also sells merchandise, primarily collateral forfeited from its pawn lending operations. The mission of EZCORP is to be the leader to serve short-term cash needs to consumers who are cash or credit constrained. EZCORP Inc. was founded in 1989 with the establishment of 16 pawn shops. The company now owns four brand names and operates in 13 states under those brands. The brands are EZPAWN, EZMONEY Loan Services, EZMONEY Payday Loans and EZ Loan Services. The company works in the consumer finance industry helping consumers get access to short-term cash when they are in need. It can provide this service through all of its subsidiaries which provide short-term loans or purchase of the customer's items. The corporate headquarters for EZCORP are in Austin, Texas. There are nearly 3,000 employees working at all EZCORP s locations. EZCORP operates more than 1,000 stores, including over 500 pawn stores in the U.S. and Mexico and over 500 short-term consumer loan stores in the U.S. and Canada. The company also has significant investments in Cash Converters International Limited, which franchises and operates a worldwide network of over 600 stores in 21 countries that provide financial services and sell pre-owned merchandise, and Albemarle & Bond Holdings PLC, one of the U.K.'s largest pawn broking businesses with over 140 stores. BUSINESS AND GROWTH STRATEGIES Business Structure The Pawn Loan Pawn loans are a quick and easy way to borrow money without a credit check. Loans are based on the value of person s collateral, not credit rating or pay schedule. Subject to individual state laws, a typical pawn loan may have a term length of 30 days/one month, plus a 30-day/one month grace period. Pawn shops are regulated by laws such as Truth In Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, PATRIOT Act, and Federal Trade Commission Rules on Data Privacy and Security Transfer and many others. Usually pawn shops offer a variety of items such as gold and diamond jewelry, electronics, musical instruments, tools, and more. 2
The Signature Loan Signature loans are short-term unsecured loans providing you a quick and easy alternative to bank overdrafts and a means of avoiding late fees for utility bills, auto loans or credit cards. They also provide a way for to pay for unexpected expenses such as medical costs or auto repairs. Signature loans mature between 7 to 30 days. Credit Advising Services EZCORP advises individuals about the loans they are trying to get. The company provides guidance to customers in determining what type of loan to select, when and for how long. EZCORP Segments Overview EZPAWN EZPAWN provides convenient solutions to the customers needs for short-term cash. By offering pawn loans in over 295 pawn stores in eleven states and Mexico, the company also offers signature loans in select states, either in pawn stores through over 380 EZMONEY Loan Services, EZMONEY Payday Loans or EZ Loan Services stores. Some examples of merchandise are: Product Category Jewelry Electronics Video Games Cameras Appliances Home Office Equipment Examples Rings, watches, bracelets, earrings, pendants, necklaces and many unique pieces Televisions, DVD players, DVD recorders, VCRs, stereo receivers, stereo components Entire systems, game software and accessories Digital cameras, SLR cameras, camcorders, lenses, flashes and more Microwaves, refrigerators and more Laptop computers, desktop computers, fax machines, scanners, printers and more EZMONEY EZMONEY offers signature loans through over 380 EZMONEY locations in Texas, Oklahoma, Colorado, Alabama, Florida and Utah. They also offer signature loans in select EZPAWN locations. Growth Strategy: The main growth strategy for EZCORP is through future acquisitions. EZCORP expands more aggressively starting at the end of 2015. On November 5, 2009, EZCORP completed its acquisition of 108.2 million newly issued ordinary shares of Cash Converters International Limited, a public company headquartered in Perth, Australia. Cash 3
Converters franchises and operates a worldwide network of about 500 financial service and retail stores, which provide pawn loans, short-term unsecured loans, and other consumer finance products, and buy and sell used merchandise. Cash Converters now owns and operates 17 locations in Australia and 21 locations in the United Kingdom, and has more than 450 franchised stores in 21 countries, including 119 in Australia, 116 in the United Kingdom and significant presences in Spain, South Africa and France. Between June and September 2010, EZCORP acquired five pawn stores located in the Chicago metropolitan area, eight pawn stores located in Central and South Florida, two pawn stores located in Corpus Christi, Texas and one pawn store in Las Vegas, Nevada for approximately $21.8 million in cash. The stores were acquired from five separate sellers. In the quarter ended December 31, 2010, EZCORP acquired three pawn stores located in the Chicago metropolitan area and one pawn store located in Marietta, Georgia for approximately $13.7 million in cash. $6.1 million is expected to be fully tax deductible and $4.7 million is expected to be non-deductible. The factors contributing to the recognition of goodwill were based on several strategic and synergistic benefits the company expects to realize from the acquisitions. All stores were acquired as part of the continuing strategy to acquire domestic pawn stores to enhance and diversify earnings. MANAGEMENT AND EMPLOYEE RELATIONS Paul Rothamel, President and Chief Executive Officer In addition to being the CEO, Paul Rothamel also serves on the board of directors. Paul joined EZCORP in September 2009 as Executive Vice President and Chief Operating Officer. He was promoted to President in February 2010 and became Chief Executive Officer on November 1, 2010. Before EZCORP, Paul was the President and Chief Executive Officer of Pamida, an $800 million chain of general merchandise and pharmacy stores. Paul joined Pamida in 1999 as Senior Vice President, Store Operations, and was promoted to the position of Senior Vice President, Operations in 2005, and served in that capacity until assuming the President and Chief Executive Officer position in November 2007. From 1997 to 1999, Paul held the positions of Regional Vice President, Store Operations and District Team Leader at ShopKo Stores, Inc. Before joining ShopKo, Paul held various operational positions with Stores, Inc. Target and Venture Stores Inc. 4
Stephen Stamp, Senior Vice President and Chief Financial Officer Stephen Stamp joined EZCORP in November 2010, and has over 27 years of finance and business experience. He has previously served as Chief Financial Officer and Chief Operating Officer of Xanodyne Pharmaceuticals; Group Finance Director at Regus Group PLC; and Group Finance Director at Shire Pharmaceuticals Group PLC. Stephen also worked at Lazard Brothers & Company Ltd. and KPMG. Most recently, Stephen served as Chief Financial Officer at KV Pharmaceutical Company. PORTFOLIO HISTORY The UOIG currently holds 120 shares with a costs basis of $2085.92 in Svigals Portfolio. The stock has appreciated significantly since the purchase and is now worth $3646.80. This represents a gain of approximately 75%. UOIG bought 1000 shares on 1/19/2010 for Tall Firs portfolio. UOIG then sold 350 shares of that on 4/28/2011. As a result, currently, Tall Firs holds 650 shares. RECENT NEWS 05/17/2011 Acquisition of fifteen Mister Money pawn stores EZCORP, Inc. announced that it has completed the previously announced acquisition of fifteen Mister Money pawn stores located in Iowa, Wisconsin, and Illinois. The purchase price was paid in cash. With the addition of these stores, the company will continue to solidify and expand their presence in new and underserved areas. This acquisition brings the number of states in which the company operates pawn stores to 16, compared to 12 at the same time last year. 05/05/2011 Acquisition of seven Pawn Stores located in Salt Lake City Area These stores were purchased for cash from Jumping Jack Cash Utah, LLC. Strengthening the U.S. pawn presence, both through opportunistic acquisitions and new store expansion, remains an important component of EZCORP s growth strategy. The acquired stores include four traditional pawn stores, two "super stores," and one jewelry-only specialty store. 5
INDUSTRY OVERVIEW The used merchandise business, a branch of the retail industry, has been steadily growing since the early 2000s. At that time, consumers spent approximately $17 billion in this sector. New resale shops were opening rapidly in the United States in the late 2000s, and industry growth was estimated at 5 percent per year. By 2008, according to the National Association of Resale and Thrift Shops (NARTS), there were more than 25,000 resale, consignment, and thrift stores across the country. It is estimated that the industry is not driven by product-specific trends but rather by broad changes in consumer sentiment and household disposable income. Since the recession, these macroeconomic trends have taken a negative turn, causing US consumers to cut back on purchasing industry products. As a result, it is estimated that revenue declined at an average annual rate of 4.0% over the five years to 2011 $24.7 billion. In line with the recession, the steepest declines occurred in 2008 and 2009, when revenue fell by 9.7% and 7.5%, respectively. However, as the economy began its recovery, industry revenue slowed its decline slightly, falling by just 2.5% in 2010. Pawnshops were an estimated $5 billion per year business in the early 2000s. Very popular during the Depression, pawnshops were sometimes the only way for people to get money for food and other essentials. Pawnshops loan money through the security of personal property. The item pawned is then offered for sale in the pawnshop. Unsold items may be redeemed by the pawner for the same price 6
originally given by the pawnbroker. Pawnshops deal in all used merchandise, from household items to musical instruments to jewelry. The most successful chain in this sector in 2004 was Cash America International, which had 450 shops across the country. EZCORP Inc. had 280 shops, and First Cash Financial Services Inc. had 200. Combined, these three companies had more than $877 million in sales for 2004. S.W.O.T. ANALYSIS Strengths Strong financial performance during the economic recession (recession resistant) Strong acquisition strategy Strong management Weaknesses Small product diversity Opportunities Future international expansion More diverse target audience from acquisitions of Cash Converters and Mister Money Threats High dependence on consumers income Increased demand for other online selling services such as Ebay and Craig s List Risk of currency fluctuations with international expansion PORTER S 5 FORCES ANALYSIS Supplier Power: Low and Remaining Constant The main suppliers for EZCORP are its customers; as a result, EZCORP is highly dependent on its customers and their income. Barriers to Entry: Low and Remaining Constant An average pawn business requires some start-up capital. Usually it goes towards acquiring a location, purchasing inventory, and starting to provide loans. 7
Buyer Power: Low and Remaining Constant Buyers in this industry are price takers; as a result they purchase good at the specified price. Threat of Substitutes: High and Increasing This industry is highly competitive; as a result, there are numerous ways one can enter the business. With an increasing demand of Ebay, Craig s list and many similar businesses, EZCORP services can be easily substituted. In this case, people have many options to sell items and find buyers on their own. Degree of Rivalry: High and Increasing Since pawnshops and credit agencies are not difficult to start, there are many pawn shops across the nation. Consumers usually prefer to use the pawnshop not based on its quality of service, but rather, based on its location and convenience. CATALYSTS Upside Mister Money and Cash Converters International Acquisition Increasing price for jewelry, gold, and electronics Aggressive growth strategy beginning at the end of 2015 Downside Legal rules that control loan amount and credit requirements Increased demand for Ebay, Craig s List, etc. COMPARABLES ANALYSIS I chose comparable companies based on how similar their services were. I have chosen Cash America International Corporation, First Cash Financial Services, and World Acceptance Corporation. When deciding which companies to choose, I have taken into consideration, beta and growth. After taking a closer look at each company, First Cash Financial Services had the closest beta, followed by CSH and WRLD. EV/Revenue, EV/Gross Profit, and EV/EBITDA values were used as metrics to compute EZCORP s implied price. It is also important to note that WRLD is considered to be an outlier within the EV/Gross Profit multiple. 8
Cash America International Corporation CSH (35%) Cash America International, Inc. provides specialty financial services to individuals in the United States and Mexico. The company operates in three segments: Pawn Lending, Cash Advance, and Check Cashing. The Pawn Lending segment offers pawn loans through its pawn lending locations, which operate under the names Cash America Pawn and SuperPawn in the United States, and Prenda Facil in Mexico. This segment also sells previously-owned merchandise acquired from customers who do not redeem their pawned goods, as well as sells items purchased from third-parties or customers. According to ReferenceUSA.com, The Cash Advance segment offers unsecured cash advances in selected lending locations that are operated under the names Cash America Payday Advance and Cashland in the United States; and shortterm cash advances over the Internet under the names CashNetUSA in the United States, QuickQuid in the United Kingdom, and DollarsDirect in the Canada and Australia. This segment is also involved in arranging loans for customers with independent third-party lenders through credit services organization program. As of December 31, 2009, it operated 676 pawn lending locations, including 667 companyowned units and 9 unconsolidated franchised units; 246 cash advance locations; and 120 unconsolidated franchised and 6 consolidated company-owned check cashing locations. First Cash Financial Services FCFS (45%) First Cash Financial Services, Inc. operates pawn stores that lend money on the collateral of pledged personal property in the United States and Mexico. It operates in the business of previously owned merchandise acquired through pawn forfeitures and purchased from the general public. It also owns and operates kiosks inside convenience stores that offer credit services and check cashing. These pawn stores provide collateral consumer loans on pledged personal properties, such as jewelry, consumer electronics, tools, sporting goods, and musical instruments; consumer financial services, including credit services, check cashing, money orders, money transfers, and prepaid card products. As of December 31, 2009, First Cash Financial Services owned and operated 383 pawn stores and 163 short-term loan stores, as well as 39 financial services kiosks. World Acceptance Corporation WRLD (20%) World Acceptance Corporation, founded in 1962, is one of the largest small-loan consumer finance companies in the United States and Mexico. It offers short-term small loans, medium-term larger loans, related credit insurance products, ancillary products and services to individuals who have limited access to 9
other sources of consumer credit. It also offers income tax return preparation services and access to refund anticipation loans (through a third party bank) to its customer base and to others. World emphasizes quality customer service and the building of strong personal relationships with its customers. As a result, a substantial portion of the Company's business is repeat business from the renewal of loans to existing customers and the origination of new loans to former customers. During fiscal 2009, the Company loaned $1.9 billion in the aggregate in 1.9 million transactions. On March 31, 2009, World had approximately 732,000 customers. The Company's loans generally are under $3,000 and have maturities of less than 24 months. As of June 17, 2009, World operated 945 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Missouri, Illinois, New Mexico, Kentucky, Alabama and Mexico. DISCOUNTED CASH FLOW ANALYSIS Revenue: Forecasting revenue for EZCORP was slightly difficult. The company did not have a lot of figures in terms of the future growth. The only hint that I was given was a brief referral in the conference call about the potential aggressive growth beginning in 2016. It will be mainly caused through the stores acquisition and future international expansion. The investor relations team suggested that during 2012-2015, EZCORP is going to have the downturn in its expansion strategy, which will have a negative effect on the margins in the short term. However, revenue will still be increasing from 2016-2020. Beta: I predicted the Beta of.88. I ran 5-year monthly beta to understand how it is compared to other companies. I chose my comparable companies strictly based on this beta. NWC: I projected NWC to increase as the company is going to expand in the future. Due to the fact that EZCORP is a financial company, its Cash and Cash equivalencies are going down as the company is expanding in the future. EZCORP is going to pay off its debt during next year, which results in a significant decrease in total current liabilities in 2012. 10
Capital Expenditures: I projected Capital Expenditures to increase by 3% as a percentage of revenue until 2015, and then by 3.25% after 2015. As the company is growing further, these figures are going up too. COGS: As a percent of revenue, cost of goods sold remains relatively flat up until 2015 as the company consolidates its business. After 2015, COGS will increase slightly as the company continues to grow at a faster rate. Tax Rate: Due to the fact that the company did not provide any guidance for the tax rate, I decided to use federal tax rate of 35% for the entire DCF model. RECOMMENDATION I am recommending to SELL EZCORP for the following reasons: EZCORP had the highest appreciation in stock price during 2008 recession. There is a high chance that EZCORP will not perform (as well as it has been in the past) as the economy improves. After going through the DCF Assumptions, I realized that the company is overvalued. The fact that its stock price has appreciated within the past five days serves as a good indication that EZCORP will become even more overvalued in the next couple of weeks. There is a good indication that market has corrected EZCORP s overall performance during the recession. Since this financial company is dependent on people s disposable income, EZCORP does not have a lot of chances of succeeding further. Since the time we purchased the company, we have seen the return of approximately 75%. Now it is a good time to sell because EZCORP will not be as profitable as when we purchased it. It is important to realize that we cannot keep this company forever. Overall, I believe that these assumptions serve as great indication that EZCORP should be sold. 11
APPENDIX 1 COMPARABLES ANALYSIS 12
APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS 13
APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS Assumptions for Discounted Free Cash Flows Model Tax Rate 35.00% Terminal Growth Rate 3.00% Risk-Free Rate 3.12% Terminal Value 2267.18 Beta 0.88 PV of Terminal Value 978.59 Market Risk Premium 7.00% Sum of PV Free Cash Flows 497.18 % Equity 99.84% Firm Value 1475.77 % Debt 0.16% LT Debt 2.50 Cost of Debt 4.90% Cash 59.80 CAPM 9.26% Equity Value 1,473.27 WACC 9.25% Diluted Share Count 50.10 Implied Price 29.41 Current Price 30.96 Under (Over) Valued -5.02% APPENDIX 4 BETA SENSITIVITY ANALYSIS Beta St. Deviation Implied Price Under (Over) Valued 1.339 2.00 18.95 38.79% 1.223 1.50 20.98 32.24% 1.108 1.00 23.44 24.29% 0.992 0.50 26.48 14.47% 0.877 0.00 30.96 0.00% 0.761-0.50 35.32-14.08% 0.646-1.00 42.08-35.92% 0.530-1.50 51.74-67.12% 0.414-2.00 66.60-115.12% APPENDIX 5 - REVENUE MODEL 14
APPENDIX 6 - SOURCES IBIS World Lexis Nexis Academic Business and Company Resource Center MarketResearch.com Academic Reference USA www.ezcorp.com EZCORP Conference Call Yahoo! Finance Google Finance EZCORP s 10-K and 10-Q Statements UOIG Mentors: Elan Gibb, Farbod Sedeh 15