First Marblehead: Turnaround Underway but Not There Yet

| About: The First (FMD)

Our recommendation on The First Marblehead Corporation (NYSE:FMD) is Neutral. FMD is in the initial stages of a turnaround. It has rolled out its new partnered lending program with two lenders, Sun Trust Bank and Kinecta Federal Credit Union, has added tuition payment services to its product line-up through the recent acquisition of TMS, and will begin using its Union Federal Savings Bank subsidiary to originate private education loans.

That said, we believe that any meaningful pickup in revenues will be dependent upon a significant ramp-up in partnered lending loan origination and the re-entry of FMD into the securitization market, in which it has not participated since September 2007.

Until that time, FMD continues to lose money, though at a decelerating pace, with our diluted loss per share estimates at $0.81 in fiscal 2011 and $0.52 in fiscal 2012.

Fortunately, FMD has strengthened its balance sheet, and has an available cash cushion of about $225 million at present, though it is burning cash at the rate of $12-13 million per quarter.

Founded in 1991, The First Marblehead Corporation, headquartered in Boston, Mass., focused on creating private, nongovernment-sponsored, education loan programs. The company had its initial public offering on the NYSE in October 2003. First Marblehead currently has more than 200 employees.

Through a fully integrated suite of services, the company offers outsourcing capabilities to national and regional financial institutions (banks-to-mutual institutions) and educational institutions (colleges and universities), with respect to the design and implementation of private education loan programs for undergraduates and graduates.