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.
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.
posted by Never-Limp at 2:20 PM
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