EZCORP Inc (EZPW) Could Be FirstCash’s Buyout Target: Laughing Water Capital

EZCORP Inc (NASDAQ:EZPW), a Texas-based provider of pawn loans in the United States and Mexico and consumer loans in Mexico, is among the top positions of Laughing Water Capital. The hedge fund, led by Matthew Sweeney, recently released its Q3 investor letter (you can download a copy here), giving its analysis on EZCORP as well as some other companies. EZCORP is also a popular stock among hedge funds tracked by Insider Monkey. There are 20 funds in our database with bullish positions in the company.

Let’s take a look at Laughing Water Capital’s investment thesis on EZCORP:

EZCorp has moved past the stock price weakness caused by the convertible bond offering which I detailed in our 1H’17 letter. More importantly, the company recently announced a major acquisition in the form of 112 Latin American stores. While operationally this appears to be a good use of cash, there are larger implications which I believe will play out in the months and years to come as the market digests the news. First, for the last few years the narrative surrounding EZPW has been somewhere between “it is a disaster” and “they have a lot of changes to make.” As the company enters the final year of their 3 year plan with a cleaned up balance sheet and incredible operational improvements, the narrative should shift to, “they are back on a growth track,” which should lead to increased interest from the investment community.

Secondly, for the last few years while EZPW struggled, their largest competitor, FirstCash (FCFS) has been hoovering up large pawn operations throughout the western hemisphere without any competition. Now that EZPW has signaled they are back in the game, I believe it is likely that FCFS will realize that their best move would be to buy EZPW, even if it required a large premium. First, FCFS would be able to realize massive synergies by eliminating virtually all of EZPW’s infrastructure. Second, if they do not buy EZPW, FCFS will be living in a world where all of their substantial growth ambitions will lead them to competitive bidding processes, driving up prices.

Simply stated, paying up for EZPW means they will be able to pay down for every other pawn group.

Rawpixel.com/Shutterstock.com

Boasting a market cap of around $532 million, EZCORP Inc (NASDAQ:EZPW) is engaged in providing pawn loans as well as selling merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers. The company now has more than 870 pawn stores, including 513 in the U.S. and over 350 in Latin America.

For its third quarter ended June 30, 2017, EZPW reported an 8% increase in total revenue to $183.6 million. Its net revenue rose 5% to $105.6 million mainly due to a 5% increase in pawn service charge revenue and a 4% increase in merchandise sales. Operations expenses jumped 1% to $74.2 million due to investment in customer facing labor and higher benefit claims. The company posted a profit of $5.53 million, or $0.10 per share, compared to $2.90 million, or $0.05 per share, in the last year’s same quarter.

Last month, EZCORP Inc (NASDAQ:EZPW) completed the acquisitions of GuatePrenda – MaxiEfectivo to boost its presence in Latin America. GuatePrenda – MaxiEfectivo owns and operates 112 pawn stores located in Guatemala, El Salvador, Honduras and Peru. The purchase price was over $53 million in cash.

Meanwhile, shares of EZCORP Inc (NASDAQ:EZPW) are down over 7% this year. The stock has moved just over 3% up during the last 12 months. On Friday, EZPW closed down 1% to $9.90. The consensus average target price on the stock is $11.00, while the consensus average recommendation is ‘Overweight’.

Don’t miss to read our articles discussing Laughing Water Capital’s investment thesis on IES Holdings, Franklin Covey, Redknee Solutions.