TPS Trade Alert – February 28, 2013

| February 28, 2013

February 28, 2013


Buy First Marblehead (NYSE: FMD) up to $1.15 per share.

Trade Rationale:

As the housing market recovers, the rash of mortgage defaults appears to be slowing down.  More and more people are qualifying for home loans.  And, bad loans from the housing bubble days have been written off.

However, while the mortgage crisis is over, there’s another debt crisis looming.

But this time, it’s student loans.

College debt is soaring.  Universities are charging higher than ever for tuition.  And, students are struggling to find high enough paying jobs to meet their loan obligations.

It will interesting to see if the government steps up to do anything about the growing student loan default rate.

In the meantime, private companies are stepping up to help navigate the complex world of student loans.  Some companies are offering products and services to help lenders, schools, and students more efficiently handle the loan process.

One such company is First Marblehead (NYSE: FMD).

FMD works with schools and lenders to help meet the exploding demand for private student loans.  Essentially, the company provides outsourcing services for designing and implementing private education loan programs to national and regional financial institutions, as well as educational institutions.

For lenders, FMD works with banks and credit unions to design, underwrite, originate, and manage student loan programs.  The company’s primary product in this space is the Monogram Platform, an outsourced end-to-end private student loan solution.

For schools, the company gives colleges the ability to connect students to a wide range of private student loan options.  FMD helps schools ensure that students have the info they need to borrow responsibly and meet the varying needs of their student population.

There are a couple things we really like about FMD…

First off, the private student loan market is enormous.  The company estimates the gap between traditionally available loans, scholarships, and grants and the actual costs of attending college to be $135 billion.

There’s clearly plenty of opportunity for growth.

What’s more, FMD recently acquired Cology, a provider of processing, disbursement, and life-of-loan servicing.  Cology provides services to over 250 credit unions and lending institutions.

As such, FMD has significantly increased its customer base.  Plus, Cology is a perfect complement to the services FMD already offers.

And that’s not all…

FMD is also showing solid growth.

For the most recent quarter, the company’s facilitated loan volumes (FMD’s key revenue measurement) increased to $151.4 million.  That’s an impressive 134% year over year gain.

The strong growth was driven by the addition of Cology loans plus a 42% increase in Monogram-based loans.

While FMD is still operating at a loss, operating income did improve 27% year over year. That’s a good step in the right direction.  And with the addition of Cology this year, positive operating income is on the horizon.

Additionally, FMD has an excellent balance sheet.

The company is sitting on $182.5 million in cash with no debt whatsoever.  It’s hard to argue with those numbers.  Not to mention, current assets are 3.4x current liabilities.

Here’s the thing…

Despite First Marblehead’s huge potential market, strong growth, and rock solid balance sheet, the shares are extremely undervalued.

At a current price of $0.88, the stock’s trading at just 0.48x book value.  So, if the shares just trade up to book value – a very reasonable expectation – they’ll more than double.

Even more surprising, the company’s cash per share is $1.64.  That means FMD’s cash position alone is worth nearly twice the price of the stock.  It doesn’t even include the growth potential of the business.

That’s crazy no matter how you slice it!

Let’s add FMD to our portfolio while the shares are trading at an unbelievable bargain.

Remember to use limit orders when placing your trades.  And stick to your position sizing rules.

Key Facts:


Company: First Marblehead
Ticker: FMD
Recent Price: $0.88
Market Cap: $97.8 million
Avg. Daily Volume: 206,337 shares





Category: TPS Trade Alert

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