Friday, February 10, 2006

EZCORP may not be a household name, but its business reaches more and more people every day. Its 281 pawn shops and 242 payday loan locations, charging cash-strapped consumers high interest rates for a quick loan, have boomed lately, with sales and earnings growing at a double-digit clip.

But management and legislative concerns are giving investors pause.

At the company's EZPAWN shops, consumers hand over their possessions as collateral for a loan. The loan is generally due in 30 days, although the payback period can be extended for an additional fee. Consumers who don't want to involve their prized possessions for cash can apply for a payday loan at one of the company's 242 EZMONEY stores.

With little more than proof of a job and bank account, a customer can receive up to $1,000 to meet short-term cash needs.

The fees? EZCORP charges $15-20 per $100 borrowed. The company would like customers to think the fees are modest in comparison to credit card late payments, but that may not be the case. If a person borrowed $100 for 30 days at a fee of $15, that's an annual percentage rate (APR) of 180 percent. The company will allow the consumer to extend the payday cash advance for a couple of periods — plus additional fees, which make the APR even higher.

Given the high level of consumer debt, the demand for payday loans has risen dramatically. More than $40 billion in such loans were granted last year alone, a fact reflected in EZCORP's most recent financial quarter. The company's net income jumped 37 percent above the prior-year period, with a 23 percent rise in revenue.

With economic conditions expected to remain bullish, EZCORP upped its projections for the fiscal year 2006. It expects earnings between $1.50 and $1.55 per share (compared to $1.09 in 2005), with a potential jump to $1.86 per share in 2007. It shouldn't surprise investors that a company in this business may engage in several business practices that might raise concerns, however:

1. Madison Park LLC, a firm whose sole owner also controls 1.2 million class B voting shares, also earns a six-figure consulting fee.
2. The company will not say how much of this quarter's net income resulted from the sale of old or bad debt.
3. Finally, there are the ongoing regulatory concerns of the payday loan business in general. The industry has won some recent court battles, but the growing consumer outcry against high loan fees could result in a legislative backlash at any time.

Trading near its all-time high, and at less than 50 percent of its projected growth rate, EZCORP might seem like a good deal for investors. But when you factor in its questionable management structure and the questions concerning the long-term earning potential of payday advance loans, the legislative future of which is very much up in the air, the stock looks like much less of a deal.

This entry was posted on Friday, February 10th, 2006 at 2:23 pm and is filed under National.