If I had been looking for it, I would not have found it. It was serendipity, that ability to make fortunate discoveries accidentally, that opened that door in my watch list, so to speak.
I was perusing Prospect Capital Management's (PSEC) Discussion of Q2 2013 Results - Earnings Call Transcript because I was weighting whether to invest in it or not, when I found this part of the discussion:
That diligence deep dive goes all the way back to 2007 when we made a junior debt Investment in a company called Regional Management, which is now a publicly traded company. I remember, with that transaction, we analyzed the financials, I think, going back to the 1980s. So we looked at multiple economic cycles, multiple recessions, analyzing delinquencies and charge-offs. And we're quite intrigued that in that business and businesses like that, yes, there's an impact during economic recessions but not as severe as one might surmise without doing further investigation analysis. So we like the steadiness of the business.
So I have Prospect Capital Management that invests in a company called Regional Management (RM). They accurately analyze the financials, going back 20+ years. They look at it thoroughly. They like the steadiness of the business. That mention sparked my curiosity. I began to research it on my own.
A Company Called Regional Management
Regional Management Corp., a diversified specialty consumer finance company, provides loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders. The company offers small installment loans, large installment loans, automobile purchase loans, furniture and appliance purchase loans, payment protection insurance relating to loan products, and ancillary products and services.
(source: Seeking Alpha)
A quick note: My research focuses on two main areas: cutting edge biotech companies (Dendreon (DNDN) and Sangamo (SGMO) are two examples) and dividend paying companies (here's a link to my last article on the subject). RM is not a biotech and it does not pay any dividend yet. This is why if I had been looking for it, I would not have found it.
In other words, it's an underfollowed company. I sensed an opportunity.
I went on the internet, looking for the company website. I found and read thoroughly the latest investor presentation, which is here: January 2013 Investor presentation.
- Specialty consumer finance provider focused on installment lending
- Branch-based lender with 223 storefronts in 8 states as of January 3, 2013
- Loans ranging from $300 to $30,000 with maturities 6 to 72 months, no real estate
- As of September 30, 2012:
- Gross receivables book of $483.8 million
- Serve over 219,000 individual borrowers
- Average outstanding loan balance of ~$2,200 per account
- Partner with 600+ retailers to offer point-of-sale financing on showroom floor
- Serve 2,100+ independent auto dealers and 800+ franchised auto dealers to finance purchases by their showroom customers
- Organic growth story - driven by de novo store openings and repeat business from satisfied customers
- Secured lender - with proven credit performance through multiple economic cycles (see PSEC comments as independent and authoritative confirmation)
- Responsible lender - utilizing credit checks on all new borrowers combined with in-person underwriting
- Diverse product offering - serving a broad range of customer needs
- Traditional funding structure - asset-based credit facility from a syndicate of traditional commercial banks
- Significant runway for domestic growth - recently entered its 8th state with attractive demographics and regulatory environment in a number of additional states
- New branch model proven over time. It mitigates execution risk - one store closure in 25 years! (emphasis mine)
Attractive Market Opportunity
Large addressable population in U.S.; over half of adult Americans earn less than $75,000. Opportunity for over 800+ additional branches. From 2007 to 2011, annual same-store revenue growth averaged 14.7%. Same-store revenue growth in Q3 2012 was 18.3%. 58.2% of branches less than 5 years old represent significant embedded growth in the existing store base.
Regulation as a Wide Moat
I'm seeing that in other industries as well. Increasing regulation, while intended to protect the customers, has a side effect: it curbs competition. Established, big companies can comply with regulation more easily than smaller rivals. It gets tougher for new competitors to enter the market.
This Just In
I was about to complete this article when Regional Management released its fourth quarter 2012 and full year 2012 results on Feb. 27, 2013.
Here's an excerpt:
For the fourth quarter ended December 31, 2012, Regional Management reported total revenue of $37.0 million, a 25.7% increase from $29.4 million in the prior-year period. Interest and fee income revenue for the fourth quarter of 2012 was $32.9 million, a 29.7% increase from $25.4 million in the prior-year period, primarily due to a 42.7% year-over-year increase in finance receivables. Insurance and other income for the fourth quarter of 2012 was $4.1 million, a 1.1% increase from the prior-year period. Same-store revenue growth for the fourth quarter of 2012 was 17.0%.
Stock is trading at single-digit Price-to Earnings ratio (as of 02/28/2013 market close, Yahoo! says 8.80, Seeking Alpha says 7.70). Yet it's growing at double-digit pace. It is my opinion that this company is currently a buy.
This stock is lightly traded and can move drastically in either direction over the short term. I look at it as long-term investment. For those readers that are not prepared for the stock price gyrations that such a small company can provide, it may be better to look for larger and more stable businesses.
Disclaimer: Material presented here is for teaching and entertaining purposes only. It is not intended to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above. Investing includes risks, including loss of principal.