I’ve written a great deal about Nicholas Financial (NICK), probably more than any other stock. The company is a small firm that provides loans for used cars. If you've read my blog for some time, then it's no secret to you that I believe the stock is going for a tremendous bargain and that the investing public doesn’t properly understand the company. Currently, no Wall Street firms follow the stock. I think I'm the only person who writes about Nicholas.
Here's my take: I think investors have mistakenly lumped Nicholas in with other subprime lenders. They see "used car loans" and instandly think toxic debt. The major difference is that Nicholas doesn’t securitize its loans and the company is rather conservative in its accounting.
Make no mistake, Nicholas’ customers have been hit hard by the recession that has impacted the company’s portfolio, but Nicholas is still a fundamentally solid business. I’ve spoken with senior management a few times and each time, I’ve come out feeling that Nicholas is well-run and will thrive. I will also reveal that Nicholas is currently my largest personal holding.
The fiscal fourth-quarter earnings report is due out sometime this week. My forecast is that Nicholas will earn about 25 cents per share (give or take). I think it’s very possible that Nicholas will earn as much as $1.20 per share during this calendar year (I’ll say $1 a share is the low end). Now bear in mind that this is a stock currently going for $8.75, or about seven to eight times forward earnings.
Nicholas tends to be a fairly stable business except for one metric—provision for credit losses. In other words, bum loans. This number skyrocketed but it’s been coming down. Last quarter, it hit 5.34% which is nearly half what it was in September 2008. Every inch that number falls, it's better for Nicholas. I’m hoping it will fall below 5% for this report. The provision for credit losses has fallen now for five straight quarters.
Even if my forecast if off by a little, I’m not worried at all. The valuation is so low that there’s an enormous margin of safety. This post probably best spells out why Nicholas is such a compelling buy.
Here are some very basic projections: I think that receivable will be about $230 million. The gross yield will be about 25.4% which will make revenues around $14.5 million. Interest expenses will rise to about 2.4% or about $1.4 million. This will make net revenues of about $13.1 million.
I’m pegging the provision for credit loss at 4.8%. Since the economy in Florida is still rough, this number will see smaller and smaller declines. Ultimately, I think NICK is worth $12 to $15 a share. This is an outstanding buy.
(Be warned that NICK is a micro-cap so that shares are somewhat illiquid. I actually prefer that. The stock can trade with a wide bid-ask spread. It's also common for NICK to go a whole day without trading one share. This may frustrate some investors.)
Disclosure: Author holds a long position in NICK