FMD, side 2: For this series, we started an interactive discussion of First Marblehead (FMD) as a candidate for investment. The objective is to work through the Stock Selection Guide (SSG), using Toolkit 5, until the stock proves unsuitable, or we can reach a decision. Along the way, I intend to review what information might be available to indicate suitability, from other sources as well. At the conclusion of Side 1, we'd found “At least two heavy caution flags, and two good signs. The question becomes: if you own it, do you hold it, or if you're considering it, should you go ahead? Given the two caution flags, I say “don't buy”, but if you've got it, perhaps hold. Continue the review for holding.”
A quick check of the “sustainable growth rate” with ((Alt))+((S)) shows a purported “sustainable” growth rate of 75%. That seems far too high, so we'll stick with the forecast selected in Side 1. Now on to Side 2.
A quick look at Section 2 of the SSG shows both lines A and B are “up”, a good sign. The pre-tax profit (PTP) and return on equity (ROE) both seem to be rather high for most companies, with some variability. Using ((Alt))+((R)) we can change the ROE to use end of the year figures, and it changes from “up” to “down”. However, the first two years' data are excessive, with over 100% ROE, and removing those two years as too high changes it back to “up”. However, that leaves us only three years' data to work with. Food for thought.
Using ((Alt))+((D)) we can check the debt-to-equity level on the company, and it is going down, consistently, a good sign.
Looking at Section 3, we see a P/E ratio calculated at a default of 24.1 high and 10.5 low, over the last four years. While that seems reasonable, we can check Line 4A's figures by clicking on the green box. The historical figures are shown, and are somewhat sparse. Using ((Alt))+((M)) to remove the “inconsistently high” or top-half of the figures gives a P/E of 15.4 and 6.6. Given the recent trashing of the financials market, using the lower figures seems appropriate, so I selected those.
Now, what “low price” to use? Well, recently FMD has been at a low below the norm, and well below its “projected low” that we would normally use. Therefore, we need to select something below what it is today as a “conservative” estimate. Balance this against some forecasts that the financial markets are going to be several quarters sorting themselves out, indicating continued “lows”. The recent low was 7.4, current price is around 7.5, so I selected 25% lower, at 6, as a “low price” it could get down to, to start the work with.
That gives an U/D ratio of 59.4, which seems far too high, and suggests something wrong. Additionally, the PEG is at 15, which seems low even for financial companies. And, the relative value is at about 12%, again, rather low. There's something we don't know yet.
A quick look at the projected average return and the estimated total return has returns in the 50% to 60% levels. That seems excessive too.
The “conventional wisdom” is that the worse a company is performing, the better it appears on Side 2, and this looks “fantastic” on Side 2. So, what do we not yet know?
Launching TakeStock4, and entering the symbol FMD, we get a warning about the company being too young, therefore speculative. That compares well with the relative lack of data for the SSG, so we should take this warning into account. The visual comparison in TakeStock4 looks good, and sales and EPS growth rates are capped at 20%, comparing well with our earlier (Side 1) estimates. Results are similar for PTP and ROE, also capped, at 50%, indicating our cautious treatment of these rates may be correct. The forecast average PE on the back side of TakeStock4 shows 10.9%, roughly in the middle of what we'd selected for the SSG, so again, we're not too far off. The P/E range shows in the lowest end of its historic band (no surprise here), and the projected and total return are both quite high.
Firing up a browser, and turning to Reuters for more information, as we need to dig deeper: There's been no major change in management, but the team has been together only a few years.
The company is in the business of packaging student loans and reselling those packages.
Checking Key Developments: We find that they declared a dividend no higher than the same quarter last year (1Q2008), thus frustrating analysts' projections of growth. Most significantly, they chose NOT to execute securitization transactions in the quarter, announced in early December. Since that's what they make money at, one MUST wonder what they're up to.
However, in second quarter 2008, per a press release of 31 January, they're back in business, gained investment, and increased their business quarter-over-quarter. But, this is a press release.
Where does this leave us? In a bit of a quandry. The company has what appears to be good management, and would be a good investment, but has been “spanked” by the financial markets. Before the sub-prime mess, it looked good. Now I am not so sure.
Checking insider trading on Reuters, we see that one Mr. Anbinder, a Director, has been steadily selling blocks of stock since last September. No other executives have this record, so it may be merely that this one had something he wished to do.
Conclusions for now: if you have it, hold, but watch. If you're looking at it, give it a quarter or two to rebound. If you've speculative money burning holes in your pocket, it might be a really good buy in the financial sector for now.
Given the comments by Mr. Craig about the barbed wires, I agree; perhaps keep an eye on it for something “spanked” by the market but perhaps reviving later.
The usual disclaimer applies. This is a discussion for learning only; no recommendations for investment are implied or intended. You make your own decisions. I'm doing this to learn how to use the tools intelligently, and appreciate any constructive feedback.
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