Warren Would be Proud

In this environment, there are a lot of good buys on the market. EZCorp is my favorite of them. EZCorp is a pawn shop operator with operations concentrated in the United States, and aggressive growth internationally, particularly in Canada and Mexico.

In fact, they do quite a bit more than pawning, but all of their operations are focused on providing financial services to the "under-banked" lower class. Due to the paucity of competition in this sector, they enjoy enormous margins and are growing quickly - if they come in-line with guidance on 8 November (they rarely miss), EPS will have grown at a compounded rate of 30% over the last 4 years! Even if you halve this growth rate moving forward, with a P/E of 12, you get a PEG of .80 - great value.

This company is also run very prudently: conservative accounting, no debt. Their expansion and acquisitions have been financed entirely by internal cash flow. Since they are reinvesting so much cash into their business, Price/FCF is not a good valuation metric, but their CFO over the last 12 months is $337M, yielding a Price/CFO of 4.15. I know, kind of an odd metric, but the bottom line is that they are generating a ton of cash.

This stock has been killed over the last few months. It sold off hard after missing revenue expectations by one cent last quarter (they met earnings). Combine that with a broad sell off in global equity markets and an analyst downgrade, and you have a stock trading at nearly a 40% discount to where it was in July.

What are the catches? The biggest one is that the publicly-traded class B shares are non-voting. This means a substantial discount (maybe 25%?) must be applied to valuations of comparable firms. This also necessitates closer monitoring for signs of agency problems between voting and non-voting equity holders. There have also been concerns of regulators cracking down on some of EZPW's business lines. However, with the current deadlock in Washington, I do not foresee the realization of any regulatory risk events until sometime in 2013 when next administration begins implementing their agenda.

Bottom line is that this is a big-time growth stock trading close at a value stock valuation - huge upside. Applying a 15X multiple (very reasonable for a company experiencing as much growth as they are) to next year's earnings of $3 gives you a conservative price target of $45. I would not be surprised to see this stock trade at or near this level over the next 12 months, as multiples expand and earnings continue to impress. Over an even longer time horizon, as EZPW's market cap and volume increases, it will meet the investment standards of the larger institutional investors, and multiples should expand further, making this stock a great long-term play.

Disclosure: I am long EZPW