Investing in the Pawnbroker
Sunday, March 16, 2008
A recession may be the bane of most businesses, but it's a potential blessing for pawnshops. Tight times mean strapped consumers are more likely to hock Mom's pearls to pay a credit card bill. With credit harder to come by, more borrowers will see pawnshops as lenders of last resort. And with so many people struggling to make ends meet, they may head to secondhand stores to buy their next TV or diamond ring.
This countercyclical business -- so-called because profitability runs counter to general economic trends, at least to some degree -- has three major players. We suggest passing on shares of the smallest, First Cash Financial Services, which has been having trouble with its "Buy Here/Pay Here" used-car dealerships. First Cash says it expects weak sales and mounting losses from bad auto loans this year.
EZCorp has more appeal. The Austin company operates 295 EZPawn shops and 380 EZMoney cash-advance stores in 13 states and Mexico. EZPawn accounted for 73 percent of the $372 million in revenue the company generated in the fiscal year ended Sept. 30.
Moreover, EZCorp holds a 29 percent stake in Albemarle & Bond, a British pawnshop operator and payday lender. "In the U.K., there isn't the stigma about pawn and payday loans that there is in the U.S.," says Elizabeth Pierce, an analyst with Roth Capital Partners.
EZCorp sees opportunities south of the border. It opened its first Mexican pawnshop in early 2007 and has since added 24, including 20 in a single acquisition. The company plans to add up to nine more pawnshops in Mexico (plus 100 EZMoney stores in the United States) in the fiscal year that ends in September.
The cash-advance business is the weakest link in a deteriorating economy because payday lenders could face a growing number of defaults. The regulatory environment for payday lending is another concern; laws and regulations in the United States vary by state and can change quickly.
EZCorp's profit has grown at a 38 percent annual clip over the past three years, and analysts anticipate earnings to rise 11 percent annually over the next few years.
Cash America International offers loans in 499 pawnshops, 304 cash-advance outlets and 139 Mr. Payroll check-cashing kiosks.
CashNetUSA, the company's Internet-based lending platform, has been growing fast. Revenue last year was $185 million (a sixfold increase over the 2006 figure), or 20 percent of Cash America's total 2007 revenue. The online segment operates in 32 states and Britain, which helps spread the company's regulatory risks.