Nicholas Financial Undervalued - But for How Long?

| About: Nicholas Financial, (NICK)

Nicholas Financial (NASDAQ:NICK) will report its fourth-quarter earnings on May 5. I’ve probably written more about NICK than any other stock. It’s done incredibly well for us and I’m very happy to say that I continue to see more success for NICK.

By just about any reasonable valuation, NICK is absurdly cheap. The stock closed Tuesday at $12.16 per share.

Let’s look at some numbers. For the first three quarters of NICK’s fiscal year, the company earned $1.01 per share. I’m projecting that it’ll see 40 cents per share for Q4.

If someone told me two years ago that NICK could earn 40 cents per in one quarter, I would have thought they were nuts. And I never would have thought I’d be the one making that projection, but that’s a very reasonable target for NICK’s Q4 earnings.

That would bring NICK’s full-year earnings up to $1.41 per share which means the stock is going for 8.62 times trailing earnings. That’s an earnings yield of 11.6%. Let’s just say there aren’t many bonds giving you that.

Additionally, the quality of NICK’s portfolio is increasing. Some of the improvement in NICK’s bottom line is due to lower reserves. I really can’t hold that against the company since it means it was overly conservative during a very rough patch.

Short-term interest rates continue to be very low, which also helps NICK. The company borrows for 5% and lends out for 25% -- an equation I like a lot. Mind you, there could be troubles in NICK’s future like higher oil prices or a downturn in the economy. Yet the company has shown how well it can manage itself during difficult times.

For the coming fiscal year, I think it’s very reasonable to assume NICK can earn $1.55 to $1.60 per share. If things go well, it can earn as much as $1.70. Even a modest earnings multiple on a conservative estimate means this is a $17 stock.

Since NICK is so small, it’s not followed by a single analyst on Wall Street. That’s their loss. While I feel very confident about 40 cents per share, I have no idea what the stock will do. I can’t say for certain that the market will finally realize the value in NICK, but I doubt this undervalued gem can stay a secret for long.

One final note: The stock jumped earlier this year on news that NICK might be acquired. In my view, the biggest risk was that NICK would go for too low a price. Since we haven’t heard any news since, I think it’s safe to assume that the company felt the same way. If that’s the case, then I’m glad it said no.

When NICK hits $17, I bet there will be even more offers.