This article is part of our Rising Star portfolios series.
Figuring out college finances these days is a bit like taking a calculus final before you've even had the class; good luck with all that. But thanks to Higher One
Take the high road
Higher One started out as an idea between three college friends who were looking to expand the purchasing power of their student ID cards. Fast-forward to today, and the company is providing its services to more than 675 institutions around the country -- and it looks like they're just getting started.
There are approximately 20 million students in the U.S. today pursuing some type of degree, and many of these students receive financial aid in one form or another. Higher One uses proprietary technology to cut costs and time for both parties. Through its OneDisburse Refund Management service, Higher One takes care of all disbursements and refunds (and related bookkeeping) for the schools. This cuts down on the time and costs involved with cutting checks to the students.
For students, the company offers a free checking account through its products like OneAccount Flex, a checking account geared toward students' needs. With a number of ways to exempt account holders from monthly fees, Higher One offers students an attractive alternative to the accounts that big banks offer.
Make no mistake, though, Higher One is not a bank and it doesn't extend any credit. In order to offer banking-related services, the company maintains mutually beneficial relationships with companies such as The Bancorp Bank
Three reasons to go higher
Can you be specific?: Higher One focuses on a specific (and often underserved) market: Students. In the past, many big banks used student checking accounts in order to sell up credit cards and other more profitable products. But with new laws making it more difficult for students to get credit cards, among other things, big banks aren't seeing the same payoffs as before. This has opened the door for Higher One.
Owner operators: Co-founders Miles Lasater and Mark Volchek have grown the business from its inception in college to what it is today and hold the positions of COO and CFO, respectively. They helped take the company public in 2010 and own more than 7% of the shares outstanding.
Travelin' light: I'm a big fan of capital light business models that don't require a lot of expenditures to make money. Higher One doesn't have to worry about heavy-duty capital expenditures, and the repeatable nature of the business model makes it that much more attractive. With a large potential market yet to be reached, the growth prospects are impressive.
Why would it go lower?
Swipe it: Higher One makes a good portion of its hay from account revenue including the multiple transaction fees from debit card transactions. Any changes in legislation limiting their take could have a serious effect on the bottom line.
Small fish: Like it or not, big banks still have the scale to get in this space and make a go of it if any of them ever decide to. I would still like Higher One's chances if this happened, but it would be tougher regardless.
Newbie: Fresh off its IPO in June 2010, the company doesn't even have a full year's worth of 10-Qs under its belt. The limited amount of information means not much of a track record to go on.
How high can it go?
There's not a lot to go on historically speaking here. But we know that the more schools the company signs up, the larger the student base for it to offer the OneAccount and other potential products. Today the company trades for about 20 times forward estimates and 26 times free cash flow. For another perspective, I also put together a model with some reasonable assumptions in OneAccount growth over the next 10 years, and I can see shares being worth about $17 today. This doesn't leave much room for error, but I also believe that Higher One has some serious growth potential ahead of it if things go well.
Onward and upward
I've had Higher One on my watchlist for a while now; as a matter of fact, I just finished up an interview with Lasater, who shed some additional light on the business and his thoughts for the future, so look for that out soon as well. It's a newbie and a small cap, which mean this one is a little riskier than the others. That said, I'm going to offer up 3% of my original capital in the hope that it will reach a higher ground. Swing on by my discussion board and let me know what you think of this latest pick. You can also follow me on Twitter.