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The Impact of Gold

Lower gold scrap profit margins are taking a toll on EZ Pawn’s, EZCORP (EZPW), profits and stock price. This slideshow shows “significant year-over-year declines” in profits from the impact of scrap. Around a quarter of EZPW’s revenue comes from loan fees, three-quarters comes from pawn sales, so this is a big part of EZ Pawn’s business.

I don’t follow gold — and don’t want to — but get the sense profits and EZPW stock will recover by next year. I think EZPW is a good investment around these levels for long term investors who can wait it out.

One Year Chart

EZPW_2013_Q1The good news is EZPW’s P/E is only 8. The bad news is pawn shops don’t get P/Es as high as other companies do. I’ve owned pawn stocks, including EZPW, in the past and regulatory risk is always a concern.

In my 2008 Q2 EZPW research I see the stock had a P/E of 11 during that Bear Market. But at the time profits were growing 30%. Overall, a P/E of 10 to 12 is realistic.

Note on the right of the chart that 2013 profits will be lower than 2012’s. That’s brought the stock down, but I feel the bad news is baked into the $21 share price. What I don’t like is profit growth isn’t expected to pick up until four quarters from now. So this isn’t a timely stock — there’s no rush to get in (get it? rush? gold?).

Fair Value

EZPW_2013_Q1_FVI think EZPW can get to 10 times earnings, which is $26, 24% higher than today. If profits do hit $3 next year — and the P/E recovers — then the stock could jump from $21 to $30, a potential gain of 45%.

Sharek’s Take

EZPW has significant upside for long-term investors. I almost bought the stock when it was in the teens late last year — and now wish I had. EZPW is at the top of my radar, and if it gets to around $18 again I’ll likely get in. Oh, one more thing, this company has had profits and its stock price rise 34% a year for the last decade. It’s a growth stock, just not right now.

View the Earnings Table here.
View the Ten-Year Chart here.

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