Laughing Water Capital recently published its Q4 investor letter – you can download a copy here. The hedge fund discussed EZCORP Inc (NASDAQ: EZPW) and other companies in the letter. In this article, we’re going to focus on the fund’s comments on EZCORP, which provides pawn loans in the U.S. and Mexico as well as consumer loans in Mexico. Here is what Laughing Water Capital founder and managing partner Matthew Sweeney said about EZCORP Inc (NASDAQ: EZPW):
EZPW should be familiar as we have owned the company for 3 years now. Operationally, the company performed exceptionally well in 2018, yet shares traded down ~35% on the year. When a top position trades down 35%, it is going to put a dent in our performance. I presented EZPW at the Best Ideas Conference, hosted by the Manual of Ideas, in early January, and I have attached the slide deck to this email. The short version is that EZPW is a cash flowing, growing, recession proof business that is trading well below my estimate of net asset value. To be clear, there are things not to like here; most notably a controlling shareholder that has not always looked after the interests of minority shareholders.
However, recent changes to corporate governance are a step in the right direction, a series of one-time events will roll off in 2019, management has announced a clear plan for continued growth and operational improvement, and with time I believe investors will realize that a much-hated convertible bond offering completed in May of 2018 was done for the right reasons, at attractive prices. Importantly, potential dilution tied to this convert will not kick in unless shares rally by ~100%. It is also worth noting that this is a business whose already bright prospects should accelerate if a recession is on the horizon.