Wednesday, December 05, 2007

First Marblehead just got cheaper

Well, another analyst has downgraded First Marblehead, which has caused the shares to fall once again. The downgrade hinges on a review of 16 notes by Moody's:

The ratings review is prompted by worse than expected performance of the underlying student loans. In particular, loans originated through the direct-to-consumer channel appear to default at a significantly higher rate compared to loans originated through school financial aid offices.
Also, it appears the company will not securitize any more loans this year, which pushes earnings into next.

Now there is no doubt that earnings in the short term will be hurt if the ratings of these notes are reduced and there is no further securitization this year. And I am troubled that direct-to-consumer loans, which are the most profitable for Marblehead, are the culprits. But none of these things are likely to be long-term problems for the company. As long as the dividend does not get cut (and considering cash flow, I don't see how it could), the company trades at least 2/3 of its fair value. Since I plan on reinvesting my dividends for years to come, today is actually good news.


Return Matters said...

Ahh... it is one of those interesting times in investing. For a while the funds will sell this stock so it's not on their year end reports. Tax loss selling will kick in. Headline traders may short the stock (and cover before xdiv date).

But I don't think that students will stop taking loans. I can't imagine a college board wanting to get into the loan origination business, so continuing to outsource that function makes sense.

This is either one of two times:

a) Be greedy when everyone is fearful


b) When the tide goes out you can see who has been swimming naked

I think it comes down to a question of how low their revenue could drop if BOA pulled back some and default rates climbed to say 7 or 8% vs. their fixed costs.

If you have any analysis you would save us all some time.

The default rate that is being calculated into some of the subprime pools is just crazy -- i suspect the market is severely overshooting panic and fear on First Marblehead and it is an excellent time to buy and plan on holding for 18 months. I see a double PLUS a fair dividend which lowers your BE point over time and raises the IRR!

ps. Credit to Warren for the quotes.

Jon Ericson said...

I don't have any direct analysis, but I see the Motley Fool is weighing in with some. Today is likely to be one of the truly great buying opportunities for this stock.

Southern Smile said...

Well the market panic created an opportunity for Goldman. They understood the value of the franchise and stepped in to help FMD and themselves. I unfortunately sold some calls on the way down for some extra income while I waited for the year end selling to clear so i'll end up selling more of the position than I wanted to. (shucks!) - with a little luck the price will stay down for 31 days.

Long term, students will borrow, Universities will want to outsource (now more than ever) and FMD will do just fine. This is one to double down on, throw in the back of the account and look at again in two years. A bank may pick up the company or they will just slowly grow out of the current crisis, some dillution asside.