EZCORP: A Pawn in the Credit Game

Financial companies have become a minefield for investors. Derivatives, bad loan decisions and a faltering economy have left this sector a highly undesirable place to be. Yet if investors are looking for exposure to the lending market, there is an alternative. While conventional lenders have capital problems and loan write-downs to deal with EZCORP (EZPW - commentary - Cramer's Take) is posting strong growth and profitability.

With a portfolio of short-term, high-interest loans, EZCORP has a lending model with lower risk and higher demand. A strong financial position, good operating efficiencies and an attractive acquisition landscape mean EZCORP will likely continue to report strong results.

The unprecedented disruption in the economy leaves many people in need of short-term cash, be they unemployed or cash-strapped due to the lack of conventional credit. EZCORP fills this void by giving consumers a way to generate cash from personal property or anticipated income.

During the second quarter pawn loans grew 10%, with service charges (interest and fees) increasing 13% on a year-over-year basis. The company is reaping the benefits of strong loan demand and fee increases.

EZCORP's pawn loans are well collateralized and tend to have short terms. EZCORP typically lends 25% to 65% of the resale value of a customer's collateral, charging 20% per month in the U.S. and 13% to 14% per month in Mexico. Gross margins on the sales of forfeited collateral run in the 39% to 40% range.

The company generally charges 15% to 22% on payroll loans and 20% per loan for other short-term credit lending services. First quarter 2009 results showed a 13% increase in pawn service charges and an 18% increase in net income on a year-over-year basis. Revenue is rising faster than expenses, with operating income margins increasing 100 basis points over last year's first-quarter results.

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At the time of publication, Gear had no positions in the stocks mentioned.

Steve Gear was director of capital markets at Stockhouse.