Student loan outsourcing services processor and Motley Fool Hidden Gems recommendation First Marblehead (NYSE:FMD) will report Q2 2007 financial results on Thursday, Jan. 25, but the way the market has been treating its stock lately, it looks like it expects the company to default.

What analysts say:

  • Buy, sell, or waffle? There are eight analysts grading First Marblehead. Five of them say hold, one says buy, and two recommend detention with a sell rating.
  • Revenues. Revenues for the second quarter are expected to tumble 22%, to $179.8 million.
  • Earnings. Profits, meanwhile, are forecast to fall even further, down to $0.79 per share, a 32% drop from last year.

What management says:
First Marblehead securitizes loans primarily in the second and third fiscal quarters of the year. "Securitization" is the bundling together of loans for sale to investors. In 2006, some 41% of the company's service revenue was recognized in the second quarter; for 2005, the figure was 37%. Both quarters represent the most for any of the quarters of the year. Student loans tend to be seasonal, rising and falling as tuition payments are due. Since most loan originations occur in First Marblehead's first quarter, it's not surprising that the second quarter would see a larger number of securitizations, and the company has said it expects to be able to securitize loans in each quarter this fiscal year.

What management does:
The business model of First Marblehead tends to be lumpy, but you can see that because of the factors described above, it tends to be more profitable in the middle of the year, thanks to tuition demand. The loan processor surprised a lot of people in the first quarter, but with no quarterly guidance provided and no securitizations performed in 2006's first quarter, year-over-year comparisons were not easy.

Margins %

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Q1 2007

Gross

87.8

88.4

87.6

84.2

89.3

Op.

63.5

66.1

65.8

66.7

75.1

Net

37.1

38.9

38.9

41.9

46.1
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
There's a lot of uncertainty circling First Marblehead's stock right now, as the new Congress has introduced legislation to lower interest rates on government-backed student loans (First Marblehead services private loans that are not federally guaranteed). Despite the second quarter typically being the company's strongest, analysts are forecasting a pretty steep drop, but it's also true that the company often surprises to the upside. Considering that the rolling-12-month volume of loans available for securitization increased 38% to $3.3 billion last quarter, there's a good chance that First Marblehead might advance a grade and surprise again.

Competitors:

  • Student Loan Corp (NYSE:STU)
  • SLM Corp (NYSE:SLM)
  • Citigroup (NYSE:C)
  • JPMorgan Chase (NYSE:JPM)
  • Bank of America (NYSE:BAC)
  • KeyCorp (NYSE:KEY)

Related Foolishness:

First Marblehead has earned a five-star rating from Motley Fool CAPS, the new investor-intelligence community. You can add your voice to the new stock-rating service by joining today. It's free!

The loan processor is also a recommendation of Motley Fool Hidden Gems. A 30-day guest pass puts you at the head of the class, with all of the market-beating selections available for review.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. JPMorgan Chase and Bank of America are Income Investor picks. The Motley Fool has a disclosure policy.