EZCORP Inc (NASDAQ: EZPW): Here’re Laughing Water Thoughts on Pawn Loans Provider

Laughing Water Capital recently published its Q4 investor letter – you can download a copy here. The hedge fund discussed EZCORP Inc (NASDAQ: EZPW) and other companies in the letter. In this article, we’re going to focus on the fund’s comments on EZCORP, which provides pawn loans in the U.S. and Mexico as well as consumer loans in Mexico. Here is what Laughing Water Capital founder and managing partner Matthew Sweeney said about EZCORP Inc (NASDAQ: EZPW):

EZPW should be familiar as we have owned the company for 3 years now. Operationally, the company performed exceptionally well in 2018, yet shares traded down ~35% on the year. When a top position trades down 35%, it is going to put a dent in our performance. I presented EZPW at the Best Ideas Conference, hosted by the Manual of Ideas, in early January, and I have attached the slide deck to this email. The short version is that EZPW is a cash flowing, growing, recession proof business that is trading well below my estimate of net asset value. To be clear, there are things not to like here; most notably a controlling shareholder that has not always looked after the interests of minority shareholders.

However, recent changes to corporate governance are a step in the right direction, a series of one-time events will roll off in 2019, management has announced a clear plan for continued growth and operational improvement, and with time I believe investors will realize that a much-hated convertible bond offering completed in May of 2018 was done for the right reasons, at attractive prices. Importantly, potential dilution tied to this convert will not kick in unless shares rally by ~100%. It is also worth noting that this is a business whose already bright prospects should accelerate if a recession is on the horizon.

I added to our position near the 4th quarter lows, but I also added as the company first traded down toward my estimate of net asset value per share. These purchases are significantly under water. While in general asset value is a useful road sign for downside protection, in the case of EZPW where market participants are concerned about potential dilution, I should have built in an additional margin of safety beyond asset value. This was a mistake.

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EZCORP Inc (NASDAQ: EZPW) is engaged in providing pawn loans and selling merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers. The company has more than 870 pawn stores, including 513 in the U.S. and more than 350 in Latin America.

Shares of EZCORP Inc (NASDAQ: EZPW) are up nearly 18% so far this year. However, the stock has fallen nearly 14% over the past six months over 27% over the past 12 months. The consensus average target price of the stock – currently trading at around $9.55 – is $12.83, while the consensus average recommendation is ‘OVERWEIGHT’ for the stock, according to analysts polled by FactSet.

As our database shows, EZCORP Inc (NASDAQ: EZPW) isn’t a very popular stock among hedge funds. As of the end of the third quarter of 2018, there were 19 funds – among over 700 funds tracked by Insider Monkey – that held the company’s shares.