Pawn power: EZCorp and Cash America

by John Reese, editor Validea

Two newcomers to our recommended list come from a sector still dogged by fears -- the financial sector.

And, interestingly, both specialize in a bit of an unusual type of finance: pawn loans. EZCORP (EZPW) and Cash America International (CSH).

Both companies do what they do very well -- over the past decade, EZCORP has upped EPS every single year, while Cash America has just one dip (and that was a minor 3-cent dip back in 2002).

Pawn loans may sound a bit risky, but they may actually be one of the safer types of loans for the lender, since such firms collect tangible collateral to hold against the loans.

Based in Texas, Cash America operates in more than 1,000 locations in the U.S. and Mexico, providing secured non-recourse loans -- pawn loans.

It also offers short-term cash advances and check cashing services. The firm has a market cap of just under $1 billion.

Cash America gets approval from my James O'Shaughnessy-based strategy -- as well as from my Benjamin Graham value investing model.

Under this model, companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years.

Companies with this type of growth tend to be financially secure and have proven themselves over time. CSH's EPS growth over that period of 1,129.0% passes the EPS growth test.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15.

Stocks with moderate P/Es are more defensive by nature. CSH's P/E of 11.50 (using the 3 year PE) passes this test.

In addition, the Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22.

CSH's Price/Book ratio is 1.31, while the P/E is 11.50. CSH  passes the Price/Book test.

Like Cash America, EZCORP is based in Texas and is involved in pawn loans. The firm has more than 670 shops in 13 states and Mexico.

The company also offers some other options for obtaining short-term cash, and sells used merchandise (usually property that was forfeited as collateral). It has a market cap of about $1 billion.

EZCORP gets approval from my Peter Lynch- and James O'Shaughnessy-based models. The company also scores highly on my Martin Zweig growth investor model.

Based on the Martin Zweig strategy, the P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43.

EZPW's  P/E is 10.57, based on trailing 12 month earnings, while the current market PE is 14.00. Therefore, it passes the first test.

Another important issue regarding sales growth is that the rate of quarterly sales growth is rising.

To evaluate this, the change from this quarter last year to the present quarter (17.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (13%) of the current year.

Sales growth for the prior must be greater than the latter. For EZPW this criterion has been met.

Also under this model, the EPS for the quarter one year ago must be positive. EZPW's EPS for this quarter last year ($0.29) pass this test.

The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. EZPW's growth rate of 37.93% passes this test.

And, the EPS growth rate for the current quarter, 37.93% must be greater than or equal to the historical growth which is 37.25%. EZPW would therefore pass this test.

One final earnings test required is that the long-term earnings growth rate must be at least 15% per year.

EZPW's long-term growth rate of 37.25%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

Learn more about this financial newsletter at John Reese's Validea.