Revenue was up 19% over last year's fourth quarter, but earnings were down 5% owing to the company spreading its loan securitizations over the second, third, and fourth quarters rather than just the second and fourth. This gives earnings a less lumpy feel. However, it should be a non-issue for any investor willing to look beyond the headlines.
On an annualized basis, the company grew revenues and earnings more than 100%. Operating cash flow was up more than 200% over 2004 numbers at $108 million. As Richard Gibbons mentioned in his excellent article, First Marblehead books the net income off its securitizations now and collects the residual cash flow over five to six years. The company's cash flow numbers are highly predictable, since there is no credit or guarantor risk, so over the long term they will match earnings numbers.
Management made a bold statement that the company is undervalued with the enthusiastic repurchasing of company stock in the fourth quarter. The company bought back nearly 1.5 million shares at a cost of $56 million dollars. To put this in perspective, First Marblehead spent more on stock repurchases than it earned in the fourth quarter.
The company also mentioned that continued strong demand is driving results, and it expects to continue to capture market share. Their competitive advantage is The Education Research Institute database, which contains 20 years of data on student loan borrowers. In a brand new niche where many lenders simply do not have enough information to lend and securitize loans properly, this is a killer advantage. Companies like Sallie Mae
Speaking of bargains, this company is trading only 10 times 2006 estimates of $3.03 a share. Given the outstanding business model and strong prospects for growth, this is a stock that Inside Value fans should love.
For more A+ Foolishness on student loan-related matters, study up on the following:
Stephen Ellis welcomes your feedback. He owns stock in FMD. The Motley Fool has a disclosure policy that made the Dean's List last semester.