More on First Marblehead (FMD)

Tom Brown at Bankstocks.com once again wrote a fantastic piece on FMD. One thing that I was not aware of was how quickly First Marblehead is growing their highly profitable in-house Astrive brand. This is absolutely amazing! Here is what Brown had to say:

"As I mentioned earlier, Marblehead’s in-house test Astrive brand has gained considerable momentum. So far in fiscal 2007, Astrive has accounted for roughly 10% of facilitations; that implies it’s done roughly $300 million year-to-date, and will finish the year at around $375 million. By my reckoning, that would make Astrive bigger than Bank of America for Marblehead in the direct-to-consumer channel. Recall, too, that this is extremely profitable business, since Marblehead doesn’t have to pay out a whole loan premium to a lending partner.

The emergence of Marblehead’s Astrive business in the past few years is highly significant, in my view. Ever since we started talking about this company, the skeptics have worried that Marblehead would be toast if BofA and Chase ever severed their relationships with it. In fact, that hasn’t happened; both BofA and Chase have continued to grow their business with Marblehead very rapidly. And yet at the same time, Marblehead has been able to build up its in-house Astrive brand, from basically zero three years ago, into a business that now generates earnings that rival the earnings Marblehead gets from those same worrisome Big Two. Tell me again how reliant the company is on them?"

This is a much more significant data point than the minimal prepayment assumption increase. The more FMD can reduce customer concentration, the lower the risk premium (and higher the P/E) should be on the shares since investors typically pay up for less risk.

Here is a recap of why I like I love the stock:

FMD has declined from $57 into the $30's based on a number of misperceptions, including 1) that new legislation will significantly hurt profitability 2) that BofA and Chase will move their business to Sallie Mae and 3) that increasing prepayments, defaults and competition will materially harm profitability.

These misperceptions have generated a ton of fear and caused a fire sale. Right now, you can buy the shares at about 9 times earnings or a PEG ratio of about 0.45 based on their 20%+ growth rate that could last for many years given 20% to 30% industry growth and FMD's extremely strong competitive position. To put the icing on the cake, FMD generates high returns and a boat load of cash to give back to shareholders in the form of dividends and repurchases. The stock should probably trade in the 13 to 14 times earnings range, maybe higher.