Is EZCORP (EZPW) A Smart Long-Term Buy?

Blue Tower Asset Management LLC, an investment management firm, published its fourth quarter 2020 investor letter – a copy of which can be downloaded here. A return of 21.95% was recorded by the fund in the fourth quarter of 2020, resulting to a full-year return of 10.99%. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Blue Tower Asset Management, in their Q4 2020 investor letter, mentioned EZCORP, Inc. (NASDAQ: EZPW) and emphasized their views on the company. EZCORP, Inc. is an Austin, Texas-based pawn loans provider that currently has a $297.96 million market capitalization. Since the beginning of the year, EZPW delivered a 12% return, extending its 12-month gains to 53.29%. As of March 23, 2021, the stock closed at $5.24 per share.

Here is what Blue Tower Asset Management has to say about EZCORP, Inc. in their Q4 2020 investor letter:

“While I made a correct prediction about vaccine development, my predictions about EZCORP in my Q2 2020 letter were far less accurate. Normally in an economic crisis, demand for subprime credit is elevated and counter-cyclical companies such as pawn shops have their best years. As a result of the disposable income increase previously discussed, we have instead seen sharply declining demand for subprime credit. Pawn shops have seen loans repaid by customers and much of their inventory purchased, sending cash on hand to extremely high levels as pawn service charges plummet. Compounding this issue for EZCORP in particular was that the rollout of their digital Lana app saw very low adoption by customers. EZCORP has performed terribly in 2020 and the company has responded by replacing the previous CEO, Stuart Grimshaw, with a new CEO, Jason Kulas.

The company currently trades at an extremely depressed valuation. The company has a market cap of $258 million against inventory of $98 million, cash on hand of $305 million, long-term debt of $251 million and pawn loans outstanding (PLO) of $134 million. Using the multiples of inventory and PLO of recent acquisitions in the pawn shop industry, it seems likely that EZPW could command a price 2x to 4x the current share price in an acquisition scenario. We will continue to remain invested to see if the company can be turned around with its new leadership. Our position in EZCORP should also be observed in the context of our overall portfolio. If we were in a business environment where lenders like EZCORP were far more successful, we would expect our other more cyclical holdings to be doing poorly. Additionally, as Joban Kaihatsu shows us, patience with very cheap companies may be rewarded once a catalyst comes about.”

Our calculations show that EZCORP, Inc. (NASDAQ: EZPW) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, EZCORP, Inc. was in 15 hedge fund portfolios. EZPW delivered an 11.58% return in the past 3 months.