Monday, October 24, 2005

Report Card Class Act: First Marblehead Makes the Grade

You'd think that torrid growth stocks would already be trading at high multiples by the time you discovered them.

Think again. recently wrote a gorgeous piece of research on First Marblehead, a Boston-based student-loan facilitator.

It's a company we've been following ever since Investors Business Daily gave them a nod over a year ago.

We did our own homework -- First Marblehead (FMD) is going higher.

Normally, we'd want nothing to do with the student loan business, being as cutthroat as it is. Fortunately for FMD, they have a solid competitive advantage.

That advantage is a data system they recently bought at a bargain price of just $10 million.

Now FMD is leveraging it and generating earnings per share growth of better than 20% per year.

The new data system "gives the company invaluable insights into borrower behavior that it can use to structure loans and price them properly," writes Bankstock's Tom Brown.

Essentially what FMD does is smooth the bumps in the private college loan process.

The company gets paid for its service out of the cash generated by securitizations and through servicing fees over the outstanding life of the loans:
First Marblehead acquires a bunch of student loans and pools them together. It then sells a security backed by this pool of loans, in a similar way to how your house backs your mortgage. The interest from the loans is paid as interest to the purchaser of the security. In this way, First Marblehead takes relatively illiquid student loans, any one of which has a high chance of defaulting, and creates an investment-grade security that can easily be sold to institutions.
The student loan space is steadily growing business: FMD is poised to grow along with it.

The one downside for First Marblehead would have to be that its customer count is a bit low; they have big clients -- like JPMorgan and BofA -- just not enough of them.

Nevertheless, if FMD can sustain its spectacular growth for another 18 months, we believe that investors will pocket a handsome return.

As it stands, Marblehead is trading way below the multiple it deserves.

The stock is currently trading at $28; we're initiating coverage with $47 price target.

About Us | In the News | Management | Contact Us | Archive | Premium Membership | Terms of Use | Privacy Policy | Careers | FAQ

All quotes are 15 minutes delayed. Copyright © 2006 by Catablast! Media Group LLC, part of the SeekingAlpha network. Web Design by Synexio Systems. All Rights Reserved.