Higher One might be the most hated company on Wall Street.
Current share price implies a worst of the worst-case scenario.
Cole Taylor Bank order not as bad as expected and provides hope.
In my ongoing quest to find Wall Street's most hated companies, my research led me to Higher One (NYSE:ONE). It is a financial services and data analytics company that serves over 1900 universities and colleges. Higher One sold shares through an IPO at $12 per share in 2010. It priced below the original $15-$17 expected range, but quickly ran up to over $20 just 5 months later. It now trades in the mid-to-high $3 range which is a historic low. Stocks like these are right in my wheelhouse.
So where did the wheels fall off the bus?
While the shares have sold off consistently since 2011, the latest trauma to the company came a few days after otherwise well received Q1 earnings were reported. Although regulatory issues are nothing new for Higher One, they announced on May 13 that they face a potential penalty from the Feds that "could reach levels that would cause an event of default under our Credit Facility." This is the worst-case scenario, but I'm still not convinced that it will cripple the company as loan terms can be renegotiated and Higher One has strong growth and earnings.
On July 1 an order was issued against Higher One partner Cole Taylor Bank. In it, Cole Taylor agreed that the bank will pay fines of just over $4 million relating to allegedly misleading and deceptive marketing practices. Higher One said that any potential action against the company "remains an open matter." The company also maintains that sweeping changes have been made to its account offerings in response to the regulatory issues.
Higher One by all accounts has a fantastic business model. In fact this year they enjoy projected growth of 11.6% off of $235.65M in estimated sales and should realize a net profit of over $30M which increases in FY2015 to over $34M. Not bad for a company that the market says is worth just over a paltry $170M as of July 2. Clearly the big concern is the ability to pay this fine - which may or may not materialize. The company has just over $11M in cash.
When the order against Cole Taylor Bank was released on July 1, Higher One stock shot up over 6% under heavy volume, before pulling back in to the close as a result of S&P 600 rebalancing. Higher One was replaced by Veritiv (NYSE:VRTV) in the S&P 600 at the close of July 1 trading. Initial reaction however to the Cole Taylor Bank order by the Federal Reserve was positive and clearly exceeded expectations as being less harsh than previously anticipated. This is good news for Higher One.
There is also a strong turnaround story at work here. Higher One has a new CEO named Marc Sheinbaum, who came over from JPMorgan (NYSE:JPM) where he was CEO of the auto and student loan business for six years. The recent earnings call was well received as the stock traded up immediately. By all accounts it looks like the company has a significant chance of a successful turnaround after underperforming for the past few years. I will dive more in to the numbers, the business model and turnaround potential in future articles but for now simply want to illustrate the compelling opportunity based on an excessive selloff caused by the threat of an arbitrary fine that may or may not happen.
I believe that the worst-case scenario is priced in to Higher One stock at these levels. The market has virtually priced in imminent default of the credit facility, when this is not a likely scenario. Following the Cole Taylor Bank order release on July 1, which exceeded expectations as being not as harsh as previously thought, I took a speculative long position here.
I think that the chance of a quick move at to the high $6 post-earnings range is a real possibility in the short term once the perceived risk fades away. This represents a return of nearly 100%. With steady growth and a PE of about 5, I don't believe that this stock will get much cheaper. Unless you believe that this Fed fine will decimate the company, a long position offers a very compelling opportunity at these levels not considering any other information about the company.
Turnaround potential is the wild card
Furthermore, depending on how well you believe the chances of a turnaround are, I think that the stock has a good chance of getting back over the IPO price in the medium term and make new highs in the $20s in the long term. This is a free ride and I'm still modeling the different opportunities. Of course it would be a best case scenario and I will lay out my arguments, including an acquisition theory, in a follow up article as I continue my research in to Higher One.
Disclosure: The author is long ONE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.