(By Tim - iStockAnalyst Writer) The current state of the stock market raises a lot of questions. If a company reports good earnings, will they be able to continue the trend into the future? I am seeing a significant number of companies reporting growing, if not record, earnings and the market knocks down the stock prices anyway on fears the coming recession will hit them sooner or later. Although I am not sold on the fact that the coming economic slowdown will be a severe as current market actions indicate, I did start thinking about what kind of companies could actually benefit in slower economic conditions.
Pawnshops can do well in tough economic times. Their whole business is based on individuals whose financial situations are tight. There are thousands of pawn shops in the U.S. and the 3 publicly traded companies outlined are growth businesses as they consolidate the industry. These companies are all in two lines of business: First is the traditional pawn shop, where customers leave valuables as collateral for short term loans and the second is so called pay-day loans for short term, high fee, non-collateralized loans.
EZCORP, Inc. (EZPW) is headquartered in Austin, TX and currently has 294 EZPAWN locations in the U.S. and 30 locations in Mexico. Pay-day loans are made at 461 EZMONEY locations and 61 of the EZPAWN shops. In September EZPW agreed to a merger with Florida based Value Financial Services valued at $115 million. The Value deal will add 67 pawnshops (60 in Florida) to EZCORP's portfolio and is expected to close by 12/31/2008. Through acquisitions EZPW has generated growth rates in excess of 50% for several years.
Cash America International, Inc. (CSH) is also headquartered in Texas: Fort Worth. Cash America owns 522 pawn shops in 22 states and 290 pay-day loan locations in 33 states and the U.K. The company collects fees from 134 franchised check cashing centers. The recently reported 3rd quarter earnings handily beat estimates and were up 14% over Q3, 2007. Earnings were up 32% year over year for the first 9 months of the year. In September CSH signed a letter of intent to purchase 80% of a 100 pawn shop chain in Mexico for approximately $90 million.
First Cash Financial Services, Inc. (FCFS) is headquartered in Arlington, TX. (Texas must be a really good place to be in the pawn shop business!) First Cash owns 495 pawn and short term loan locations in the U.S. and Mexico. The total has increased by 18 in the 3rd quarter, 41 year to date and 55 over the previous year. Recently reported earnings were up 25% and same store revenues increased 15%. The company recently decided to discontinue its buy here/pay here auto operations known as Auto Master. The business purchased two years previously has sustained unacceptable levels of credit losses and winding down the business will result in a $1.75 non-cash charge to earnings.
Leaving out the somewhat unsavory reputation of the business, these pawn companies have significant positive attributes. First, net margins are in the 30% range, generating high amounts of cash. Second, they do not have to worry about the credit market, because I do not believe they do any borrowing (who would lend to pawn shop owners?). They fund their growth with cash and stock. Finally, there is lots of room for growth in this very fragmented industry.
