Sallie Mae LBO Bullish For Financial Sector

This LBO is a breakthrough for the financial sector and should help boost valuations. Until now, the theory was that the debt typically taken on in an LBO would be a deal breaker for many financial companies, which often have high debt levels to begin with and credit ratings to maintain. Additional debt from the leveraged buyout could bring downgrades of the credit rating and hurt a company’s ability to borrow.

However, the dealmakers in the Sallie Mae transaction came up with a solution...an alternative source of funding and the heavy backing of two big banks.

Under the plan, Sallie Mae could rely on the securitization of its student loans for most of its funding, and it also has a commitment of up to $200 billion from JP Morgan and Bank of America. That means any downgrade in the company's credit rating would not matter much.

A report from CreditSights analysts said the major lesson from the Sallie Mae deal was that LBO deals are now possible for financial companies that can rely on securitization, the selling of loans to investors. Firms can forgo investment grade ratings and rely mostly on securitization while having a large liquidity facility from banks as a backup plan.

Oil Update

I continue to be amazed at $60+ oil while supply/demand fundamentals continue to deteriorate for the dinosaur juice.

There are now indications that Nigeria's oil production will rebound following this weekend's Presidential elections. Production from two Nigerian fields would be slated to return 320,000 b/d from Forcados and 145,000 b/d from the offshore EA field. These two oil streams have been off-line since January 2006. If these Nigerian barrels return as planned, they would displace other OPEC oil and free up additional spare capacity, a bearish event. Meanwhile, non-OPEC production is running well above expectations and demand is moderating across the globe. How much longer can the market ignore the fundamentals and continue trading on irrational fear???

EBAY

EBAY reported a fantastic quarter and raised guidance. It's not too late to buy this stock IMO. It's undervalued at 22 times forward earnings, business is hitting on all cylindars and the stock is gaining upward momentum.

FMD - The Key Point

Jack Kopnisky, First Marblehead chief executive, said on Monday that he had spoken with Bank of America and JPMorgan Chase, and both had told him they intended to run their student lending businesses separately from Sallie Mae.

Link here:

http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20070416:MTFH28662_2007-04-16_15-48-58_N16162068&type=comktNews&rpc=44

Fire Sale on FMD

FMD is down about 25% on fear that they will lose loan volume from BankAmerica and Chase (50% of revenue), since the private equity groups of those two banks are in on the Sallie Mae (SLM) buyout. However, BankAmerica and Chase are going to continue operating their independent student loan operations, so all of this looks like a massive overreaction. The private equity groups do their own thing and will be looking to sell/IPO SLM in a few years anyway. I doubt that all of this has a big impact on FMD's revenue and earnings, but we'll see. In the meantime, I'm buying more.

Student Lenders and FMD

I’ve spent hours pondering the student lending stocks over the past couple weeks. The bears are all over them, but I think that they are wrong….way wrong. As a matter of fact, I think the negative Barron’s piece on First Marblehead (FMD) may be one of the worst articles I’ve ever read, and that’s saying something! The thing is, the consensus seems to side with Barron’s. Everywhere you look, somebody is worried about unethical activity (paying to get onto the school’s preferred lenders list) and new legislation hurting the profitability of the student lenders.

First, the lawsuits in the industry from unethical kickbacks are peanuts. Two million dollars (what a competitor of FMD settled at) for a company with a market cap of $4 billion is nothing. It’s a non-event, and FMD is not even a target (at least so far). Presumably, the big threat is new legislation that could hurt profitability. How come the bears don’t specifically discuss the legislation??? Do they even know what’s on the table? It’s The Sunshine Act. It would require private lenders to fully disclose federal alternatives to prospective borrowers. Here’s the key point....over 80% of FMD’s borrowers already take out government-guaranteed loans, likely to the max. The ones that don’t take out a government loan probably don’t qualify. Bears, please tell me how this act will change the industry fundamentals and make the private student lenders less profitable!

All of this irrational fear is creating a huge buying opportunity in an attractive industry IMO. College enrollments have risen by 3% annually, on average, over the past 10 years and show no signs of weakness, while the average 4-year private college tuition has risen by 5.5% annually over that same period and 7% for 4-year state universities (much higher than CPI inflation). At the same time, the resources available to a typical family to fund that tuition haven’t increased much. Federally guaranteed student loans tend to stay capped for years at a time. Incomes are up modestly (roughly in-line with CPI inflation) but the weakness in housing means that home equity loans are becoming less of an option (plus they are more expensive). It sure looks like private loans will continue to get a bigger and bigger slice of the tuition funding pie. They accounted for 11% of tuition funding in 2005, up from 2% in 1995.

So yeah, I’m bullish and FMD is now one of my largest positions. At 10 times earnings, I think it’s a steal. Either future earnings will drive the stock higher or they will get bought out. I actually prefer the former because I think that the stock could run for a number of years.

Shorts

The market looks very weak to me. This rebound has been unimpressive to say the least (volume, new highs, etc.), so I'm getting very interested in some shorts, especially those with exposure to housing which is in massive oversupply. Here is my short list:

MTG
NDE
CFC
AF
CTX
CHB
TOL
LEN

First Marblehead (FMD) Gets No Respect

Financial publications seems to love to hate FMD. Barron's ran a piece this week with a decidedly bearish view which prompted a firm and quick response from Tom Brown. Here is the first couple paragraphs:

Jonathan Laing’s hit piece on First Marblehead in Barron’s this weekend isn’t simply another broadside attack on the company. It’s riddled with factual inaccuracies. Let me count the ways: No, losses on loans the company has facilitated are not spiraling out of control, despite what Laing says. No, the rating agencies are not losing confidence in Marblehead’s underwriting ability (just the reverse: the company got great terms on its last deal). And no, despite years of concerns of "crippling competition," Marblehead’s profitability is not under pressure. In fact, the company has profitably gained market share and improved its profit margins.

So Laing is wrong on all his key points. A reverse trifecta! This is just another example of an opinion—I can’t call it analysis—that we have been dealing with for the past two years. Jon Laing simply doesn’t know what he’s talking about.

The full report can be found here:

http://www.bankstocks.com/article.asp?type=1&id=9881345

More CCRT Thoughts

Some of the bears point to John Devaney's partial sale of CCRT shares as a ominous signal, but knowing that he was facing a margin call and that he still owns a significant amount of shares makes me think the opposite. I mean, here is a guy that is an expert in buying and selling distressed securities and he's so impressed with CCRT's management that he became one of the largest shareholders in the company. As far as I know, everybody holds management in high regard, and for good reason...they have made nine deals in the past and all of them have earned nice returns.

CCRT Estimates Raised by Bear Stearn's

BSC raised EPS estimates by about 10% to $4.71 and $5.70 for 07 and 08. With the stock at $32, CCRT trades at an incredible 7 times this year and 5.6 times next year's estimates. The stock typically trades at 11 to 12 times earnings. Yeah, it's very cheap. If you just put a 10 multiple on the stock and they earn $4.70, you have a $47 stock within 12 months or 47% upside from current levels. Tom Brown looks to be absolutely right in his analysis several months ago....this company has the power to increase earnings significantly throughout the credit cycle because of excess liquidity and superior management.

It's also worth mentioning that CCRT gained valuable infrastructure with the Monument deal....Barclaycard's collections and customer service capabilities. This diversifies their operations and will allow them to take advantage of additional opportunities in the U.K.

CCRT Buys Big Chunk of Monument

credit card receivables at a 20% discount to face value. I continue to be impressed with how management is using its capital. Earnings estimates should be on the rise, as should the stock price.

Press release:
http://biz.yahoo.com/iw/070404/0235055.html

EBAY

I bought some shares of EBAY yesterday at $33. I think the stock is highly attractive at ~21 times earnings with a 20% growth rate. This stock is trading like a consumer staple but with much stronger growth! Indications are that business is tracking very strong which could lead to an upside earnings surprise and higher consensus estimates.