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2006 in review: EZCORP

December 28, 2006 - Austin, Texas

Ah, the value of hindsight. Had we all known in January what we know today, we could have tripled our money in pawnshop operator and payday lender EZCORP, which started the year at around $5 a share and trades today at more than $16.

Because of its limited exposure to the payday lending side of the business, it wasn't subject to many of the regulatory vagaries that beset competitors like Advance America, Cash America, or First Cash Financial. But were there signs we could have read, tea leaves we could have divined?

In the first quarter, EZCORP didn't miss a beat and reported revenues up 26% to $46.7 million year over year while earnings rose 29% to $3.7 million, or $0.27 per share. Yet some Foolish concerns included a dubious consulting contract with a controlling shareholder, management's decision to stay mum on how much debt it sold, and the potential to open itself up to greater regulatory hurdles as EZCORP prepared to expand the payday lending business. But the company shrugged all that off and raised guidance for the full year.

For the second quarter, EZCORP raised its guidance further, citing stronger-than-expected returns from its loan business, and ended up coming in at the high end of those expectations. Revenues rose 29% to $50.6 million and earnings jumped to $0.56 per share. It continued to expand the number of EZMONEY payday loan stores, but the company still derived the vast majority of its revenues from the pawnshop side of the business.

In the third quarter, it once again raised guidance. EZCORP had thought it would produce earnings in the range of $0.20-$0.23 per share range, then suggested they would be as much as $0.35 to $0.37, but they actually ended up exceeding that at $0.40 per share. It warned, however, that opening 100 new stores might drag fourth-quarter earnings down as much as $0.07 to $0.10 per share. Over the next few weeks, its shares would sell off by 20% or so.

But in the fourth quarter, EZCORP was making things look easy-peasy. It was again increasing earnings guidance and again hit the high end of its range with net income of $9.2 million, or $0.64 per share, primarily because the drag that had been predicted never occurred. Moreover, there were fewer defaults on payday loans -- what it calls "signature loans." Overall, for the full year, revenues came in 24% higher while earnings nearly doubled, giving the stock a boost to close at some of its highest valuations all year.

While that makes for some pricey comparisons to its competitors, our Motley Fool CAPS community continues to think this is still easy money.

Even though EZCORP has earned only a two-star rating, investors still believe that this company has a lot left in it. As Bull manowar100 succinctly puts it, "Regional player, expanding nationally, in a growing market, which benefits from America's poor personal financial habits." And fellow Fool TMF1000 notes, "What a play on gold, but without the risk of buying gold stocks . . . higher the gold prices the more they can loan out on jewelry -- a gold play."

Although the payday lending business doesn't contribute as much to EZCORP's revenues as its pawnshop business, it does contribute 58% to operating income, a statement of the profitability of that side of the ledger. If it continues its rational expansion plans, we might yet see EZCORP topping the charts again next year.

News Source

The Motley Fool, Richard Duprey, Staff Writer


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