Gold continues to look terrible based on our Macro Team's outlook. This is a problem for gold-sensitive pawn lenders like EZ Corp. While the company's transparency around the issue has improved, its sensitivity to the problem remains.
In the first chart below we look at the relationship between the year-over-year change in gold prices and the year-over-year change in earnings contribution from gold-related scrap sales. The second chart shows the dynamic on a longer-term basis. Note the tougher comps in their fiscal first and second quarters (the December and March quarters).
Interestingly, while gold prices were the initial catalyst, it's clearly now gold volumes that are the real problem. Note the widening divergence in recent quarters. This is attributable to rapidly decelerating volume dynamics. While we're a bit surprised by how rapid the decline in volume has been relative to the theories put forward to explain it, we continue to assume that it's a problem that isn't going away.
The other company facing a similar dilemma is Cash America (CSH).
Over the past few weeks, gold prices have moved lower, closing yesterday at $1,646/oz. For reference, the current gold price is 8.4% lower than the most recent high of $1,797/oz on 10/4/2012. This is a negative development for the payday and pawn lenders.
Joshua Steiner, CFA