Pawn Stocks Rise Faster Than 'Pawn Stars' TV Ratings

BOSTON (TheStreet) -- Whether you admit it publicly, you've probably seen Pawn Stars, the second-highest-rated reality show on TV. (Can you guess which show is No. 1?)

The show, which chronicles the daily doings at the Gold and Silver Pawn Shop of Las Vegas, is a guilty pleasure. Obsessed fans of the show are lining up outside the store to get a glimpse of their favorite character, whether it's Chumlee or The Old Man, with up to 4,000 people visiting every day.

The Pawn Stars guys are making it big. They're likable, funny and full of useless knowledge. And the pawn industry (namely the National Pawnbroker's Association) is supporting the show, having awarded Rick Harrison and staff "The Pawnbroker of the Year Award 2010" for "dramatically improving the image of the modern-day pawnbroker."

But can an everyday pawn broker, unsupported by a major television show, be a profitable investment? The answer is a resounding yes. A tight credit market and a bumbling economy have led to big returns for the three publicly traded U.S. pawn shops. EZCorp. Inc. ( EZPW) has risen 12% this year, First Cash Financial Services ( FCFS) has increased 40% and Cash America International ( CSH) has soared 48%.

So how does the pawn business work? A customer in need of quick cash delivers an item for pawn. The store loans the customer an amount at a value of roughly 60% of the item's estimated resale value. For the term of the loan, the customer pays a monthly fee (an average of 15% to 20%) or is forced to forfeit property. If the customer doesn't pay back the loan, the pawn shop sells the item, making back 40% in margin on a sale. Yes, it's a highly profitable business.

You'll notice that all of the publicly traded pawn shops have diversified operations in the name of loan and credit services. Most of the financing in this segment is done in the form of short-term payday loans, which is riskier.

TheStreet Ratings maintains a "buy" rating on all three stocks in the group. Here's a rundown of the stocks and some insights into the companies:

EZCorp Inc.

EZCorp. Inc. ( EZPW) operates pawn shops and financial-services stores in the U.S. and Mexico. EZCorp. derives about 80% of its revenue from pawn shops, with the rest from payday and short-term loans. The stock has been a big moneymaker over the past two years, more than doubling, yet has lagged its competitors this year.

While business in the U.S. has been successful, future growth for EZCorp. will likely be driven by expansion in Mexico. Stricter U.S. government regulations on payday loans (which account for roughly 25% of revenue) has led EZCorp., along with its rivals, to look for alternatives outside the country.

Millions of Mexican consumers lack access to credit. Therefore, pawn shops and payday-lending services have become commonplace throughout the country. EZCorp.'s Mexican customers pay an average of 20% in monthly service charges for a pawn loan. That's astronomical, but for someone without options and the need for immediate cash, it's a non-issue.

The StreetRatings 12-Month Price Target $38.20 (26% Potential Upside)

Rated "A- (buy)" by TheStreet Ratings: EZCorp.'s strengths are robust revenue growth, a largely solid financial position with reasonable debt levels by most measures, an impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations.

The company has grown revenue an annualized 23% over the past three years and has managed to increase sales and net income at a faster pace than industry competitors. With pawn volumes up and margins improving, management has forecast 30% growth for this year. Revenue growth within EZPW's Mexican pawn segment has been the big story, with 87% growth in the most recent quarter versus 17% for the U.S.

EZCorp. is liquid. What's more, its price-to-earnings ratio is a discount to its consumer-finance peers and is on par with the S&P 500.


First Cash Financial Services

First Cash Financial Services ( FCFS) operates pawn and consumer-finance stores in the U.S. and Mexico. FCFS has a major presence in Mexico, with 423 stores, accounting for 57% of total revenue. Mexico will also be a source for future growth -- management has noted that 80% of store openings will be in the U.S.'s southern neighbor.

If you're looking for the purest pawn-store play, First Cash is your best bet. FCFS has the smallest payday-loan segment among the group, at 10%.

The StreetRatings 12-Month Price Target $56.30 (30% Potential Upside)

Rated "A (buy)" by TheStreet Ratings: First Cash has increased sales and net income significantly, outpacing the average growth rates of competitors. FCFS improved earnings per share by 45.5% in the most recent quarter from a year earlier.

The company is also extremely liquid. But with a P/E ratio of 19, the stock trades at a premium to its peers (CSH and EZPW each trade at 13 times earnings), which is likely warranted, given the strong growth outside the U.S. and its higher share of pawn operations.

Cash America International

Cash America International ( CSH) does business in the U.S. and Mexico. The company operates in two segments, retail services (pawn and payday lending) and e-commerce (which includes Internet lending activities and online gold buying). CSH derives about 65% of its revenue from pawn operations, with the remainder from U.S. and international payday lending.

The company recently announced plans for an IPO of a majority ownership of its online lending arm, Enova International. With the company retaining a 35% to 49% stake, this could be a solid catalyst for the stock.

The StreetRatings 12-Month Price Target $69.13 (27% Potential Upside)

Rated "B+ (buy)" by TheStreet Ratings: Cash America improved earnings per share by 27.3% in the most recent quarter, demonstrating a pattern of positive earnings per share growth over the past two years.

This trend should continue. During the past fiscal year, CSH earned $3.67, up from $3.15 a year earlier. Revenue growth has been strong in both segments, with pawn operations up 18% and loan operations up 14%.

Like its competitors, CSH is extremely liquid. And Cash America's P/E ratio indicates a discount to its peers and a value on par with the S&P 500.

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser. Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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