Nicholas Financial: For the Patient Investor

Nicholas Financial (NICK) reported third-quarter earnings yesterday, and it was basically what I expected. The company earned eight cents a share, which was a big drop from the 25 cents a share it earned in last year’s third quarter. Still, it's making money, and that needs to be stressed. Revenues increased 7.4% to $13.5 million.

I was impressed to see that most of the measures of its business were fairly stable compared with previous quarters. The big exception is NICK’s provision for credit losses. That grew by 225% over last year’s third quarter, and it’s nearly 50% from the second quarter.

This confirms my earlier view—NICK’s business is in a lot of trouble right now. However, any fear that the company is about to go under isn’t yet shown by the evidence. By my guess, I would say the current market price probably reflects a 50% chance that NICK will go bankrupt sometime in 2009.

This investment will take a while to be worthwhile, but it looks to reward patient investors.

Disclosure: Long NICK

Comments

[Smart Guy:]

I think that your comment about bankruptcy is 100% wrong. Nick has a tremendous amount of tangible book equity (around $83 million). The only way for them to go bankrupt would be if their banks were to call the loan and I just don't think that will happen when they have so much equity behind the bank. In the worse case, the banks would just push them to reduce the size of the portfolio and pay down the bank debt. Moreover, in a terrible economy, you would think that the new loans being booked by NICK would be better quality than their old portfolio based on trickle down! To me, this is beyond a gift, margins will eventually return and you can bet that competition will be significantly lower. This is just a game of patience for the value investor.

2008 Nov 11 06:35 AM

[ericvann:]

On Nov 11 06:35 AM Smart Guy wrote:

> I think that your comment about bankruptcy is 100% wrong. Nick has
> a tremendous amount of tangible book equity (around $83 million).
> The only way for them to go bankrupt would be if their banks were
> to call the loan and I just don't think that will happen when they
> have so much equity behind the bank. In the worse case, the banks
> would just push them to reduce the size of the portfolio and pay
> down the bank debt. Moreover, in a terrible economy, you would think
> that the new loans being booked by NICK would be better quality than
> their old portfolio based on trickle down! To me, this is beyond
> a gift, margins will eventually return and you can bet that competition
> will be significantly lower. This is just a game of patience for
> the value investor.

The article doesn't say that bankruptcy in 2009 is likely, it says that such a likelihood is priced in. There's a world of difference.

2008 Nov 11 06:44 PM