Sunday, November 06, 2005

Class Clown: Follow Up on FMD

It has been nothing but a roller coaster ride for student loan facilitator First Marblehead (FMD).

2 months ago CEO Daniel Meyers resigned after it was discovered that he had exchanged $32,000 in gifts with a senior vice president in BofA's student loan operation.

The stock got crushed.

Until the bulls realized the issue was overblown and that FMD was a profitable company operating in a strong space.

In fact, we had come across some terrific research from Tom Brown over at the day before we issued a buy rec of our own:
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 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...if FMD can sustain its spectacular growth...investors will pocket a handsome return...Marblehead is trading way below the multiple it deserves.
The drama continues.

This past week Bank of America bailed on an automatic renewal provision in one of its many contracts with the Boston company.

We've downgraded FMD to a hold because BofA is their second biggest client -- that contract cancellation may be harbinger of many more.

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