Ezcorp Inc. (EZPW): Hazelton Capital Partners Continues To Give The Thumbs Up

Hazelton Capital Partners, LLC is a fund that has beaten the market so far in 2017. According to the fund’s Q3 letter, the fund returned 16.2% year-to-date, versus the S&P 500’s return of 14.2%. For the third quarter, Hazelton Capital Partners, LLC gained a great 7.4%, easily beating the S&P’s advance of 4.5% for the same period. Meanwhile, EZCORP Inc (Nasdaq: EZPW) is the second largest pawn shop operator domestically, and was a top five holding of Hazelton Capital Partners in Q3 after the fund added shares in July.

As Hazelton Capital Partners notes,

‘Historically, pawn shops have the reputation of being a sleazy business that preys on the disadvantaged by charging high fees to either receive cash or a loan for one’s personal property. Pawning personal property is a short-term loan; a pawn customer exchanges a personal item for cash equal to between 40-70% of the appraised value of the property. In order to get the item back, the individual needs to repay the original loan plus interest, in which rates and fees can hit monthly levels in excess of 25%’.

That being said, there is a need for pawn shops as some surveys show over a quarter of American households are underbanked or unbanked. In addition, increasing government regulation over the industry could actually be ‘a competitive edge’ for EZCORP Inc., as the company has scale that other smaller pawn shops don’t, and could potentially spread the growing fixed operational costs across its over 500 stores. Due to the increased regulation, there could be more consolidation in the sector, which could potentially benefit the company. In addition, EZCORP Inc. is in the process of rolling out a point of sale system that could give it better management of inventory and pricing, which could again differentiate itself from smaller competitors.

In terms of Hazelton Capital Partner’s long thesis, the fund believes “there to be a meaningful discount between the company’s share price and its intrinsic value” as the fund expects improved free cash flow in future years, and estimates there to be potentially 65% upside if management executes.