Ezcorp (EZPW) is an excellent play on the American consumer with a recession proof business and a skilled management team, according to Laughing Water Capital.

At last month’s Valuex Vail conference, Laughing Water presented Ezcorp as its top stock pick. The presentation makes a compelling argument for the second largest publicly traded pawn company in the US. The past few years have been difficult for the company; previous management made some mistakes that the current management has had to undo. This year is the third year of a three-year plan designed to refocus the business, sell off non-core assets and write off any unproductive divisions.

Even though shares in the company up around 300% since the beginning of 2016, Laughing Water believes there is further growth ahead as the company focuses on its new streamlined business and grows through acquisitions.

Ezcorp: Management incentives 

Management is highly incentivized to make the business the best it possibly can be. The new CEO, Stuart Grimshaw, left his job at the third largest bank in Australia to join the firm and the top 20 executives have been awarded compensation plans based on a net gearing of 20% and EBITDA growth of 80% over three years (a new target is expected in September 2017). Together management and the company’s controlling shareholder own around 8.2% of the business.

The second and third stages of the company’s three-year plan involve improving margins, loan growth, and cutting costs. A new system has changed store level incentives, and managers are rewarded for increasing store level profitability.

Meanwhile, corporate level expenses, which have historically been an area of pain for shareholders, are targeted at $50 million for 2018, down from $68 million in 2016. At the store level, management has downgraded the position of assistant managers and restructured pay awards to be more aligned with profitability. As the company improves its operating performance, there is enormous potential for growth.

According to Laughing Water, one in four Americans are under banked or unbanked leaving them no opportunity to approach short-term loan providers such as Ezcorp. The company’s average customer is 36 years old with $29,000 per year in income taking an average loan of $150 twice a year. Around 84% of loans are redeemed.

A restructuring of the balance sheet will free up further free cash flow, and this could help management finance acquisitions. There are over 8,000 independent pawn brokers in the US with many owners looking to retire.

Laughing Water isn’t the only fund that’s spotted the potential at Ezcorp. In the December 2016 issue of Hidden Value Stocks, ValueWalk’s exclusive quarterly magazine, Andrew Oskoui of Bluetower Asset Management picked Ezcorp as one of the two deeply undervalued businesses he likes today. This was his take on the company at the end of last year:

“One way of valuing EZCORP is to do a rough sum-of-the-parts valuation of its major assets and liabilities. EZCORP acquired a small pawn chain with 12 stores in February 2015 for an aggregate price of $16.5 million or $1.4 million per US pawn store. In 2007, they acquired 20 stores in Mexico for a total cost of $15.5 million or $0.8 million per Mexican store. I believe that EZCORP’s total pawn business is worth more than the sum of its individual stores due to the benefits of scale, so we can assume that each of the stores is worth at least as much as they paid for the locations.

Additionally, EZCORP’s 32% stake in Cash Converters, whose market cap is at $170 million Australian Dollars (AUD), is worth about $41 million USD.

According to a recent press release from the company, “Of the $89.8 million in notes receivable from the Grupo Finmart sale, EZCORP anticipates receiving $45.7 million in fiscal 2017. To date, $6.4 million has been received, consistent with the terms of the notes.” Therefore, we can add $83.4 to the value of the company from the sale.

A significant liability is the senior convertible bonds of EZCORP which have a face value of $230 million. EZCORP fair value estimate: $728M+$191M+$41M+$83M-$230M=$813 million. At a total value of $813 million that gives a conservative target share price of $15.90.”

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