First Marblehead (NYSE:FMD) is a classic conundrum: low P/E, strong growth, a big end market, complicated accounting, customer concentration risk and lack of long term certainty in credit quality.
The Bull Case
- It's cheap.
- Fast growth. The market is growing at 25% to 30% and FMD's Astiva channel is growing at 90%+ in terms of direct to consumer originations.
- JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC) will leave at some point but not anytime soon. Even with out them the company's reliance on them is shrinking from 65% of origination only a few years ago to now 40%.
- Not a true finanical since they don't carry loans or credit risk on the balance sheet.
The Bear Case
- JPM and BAC are still 40% of originations and that the cost to acquire assets through the company's Astiva brand is higher then investors realize given the heavy use of T.V.
- At some point these margins are coming down. Truthfully probably not for a couple of years.
- They are a financial since they carry a residual on the balance sheet. That this is mispriced when viewing where the "BBB" traunches trade in the secondary market at roughly $0.88 on the $1. This probably doesn't take into consideration prepayment assumption being wrong.
- That the "earnings" of this company are predicated on under collateralizing their securitizations. If they were required by the either the rating agencies or investors to change this model, the earnings of this company would be significantly lower. In essence the stock market is putting a different implied value of the the NAV of the assets due to timing differneces in cash reciepts nothing more. The underlying asset is worth no more or no less.
I'm sitting on the fence, and frankly, I loath these types of stocks.
I could argue with equal energy that the stock is worth $10 as I could argue it is worth $60.