The 1Q07 was marked by a firm growth in the domestic market and for the resumption of demand and the recovery of prices in the export market. [more]
Best Case Scenario:
110% YoY Growth - OK that's not sustainable so let's use 40% for 3 years
23% students use credit cards to fund college
43% reduction in current revenue and probably 50% earnings due to leverage - BoA and JPM pull out
25% mark down on residuals from excessive defaults and prepayments
15% loss from Grad Plus
Why FMD looks so dazzling
For the first half, revenues increased 87% to $500.7 million, net income increased 110% to $222.2 million, and earnings per share increased 115% to $2.34 per diluted share. ( Remember, that FMD is using half year increments because last year they only securitized three times whereas this year they are securitizing quarterly)
Biggest Risks (Jack K. - 2006 Annual Meeting)
#2 their assumptions in developing the trusts
#3 government involvement
Diversification Risk: Jack called this one right 6 months ago and Sallie Mae, Bank of America and JP Morgan put on exclamation point on it for him this month. We've - (more like Jim, Bill, and Puck) noted that BoA and JPM only make up 43% of FMD business now, but I think some of the minutes from the 2006 annual meeting might clarify better how this was accomplished and I think lessen fears to some extent. See below.
2006 Annual Meeting
1 year ago top 3 clients produce 65% of revenue
last year top 3 clients produce 52% of revenue
Increased by 50% number of clients producing over 50 million in loan volumes
Added 27 new prep or prep gate
Awarded 197 new preferred lending status and school channel
16 lending and marketing clients and retained all our major customers
Attracted clients representing 100 million consumers
(* I've added the time stamps for the webcast if your interested in listening for yourself - for those that might dose at long meetings)
Assumptions Risk: I have to claim a lot of ignorance on this count. I've tried to follow all the discussions differentiating cumulative defaults, nominal defaults, and cumulative net default rate with little success. Although, it does seems a little premature to be focusing so intensely on loans (2004-1) so newly issued. Should we not look at all their loans as a whole? On the other hand, if the CEO says it's the number two risk then maybe I should work harder to understand the details of each trust. As far as prepayment assumptions, I'm not particulary worried since I know of no one who ever paid their students loan off early. Small sample I know, but I feel safe betting on this one.
Government Involvement Risk: While Jack calls this the number 3 risk, this is actually the one that scares me the most. The only concrete movement has been creation of the Grad Plus federal student loan program for graduate students of which 15% of their business is from graduate students. The program stared July 1, 2006, so we should probably start seeing the effects this quarter. At the 2nd Quarter 2007 conference call FMD got a question about this new program. Here it is in it's entirety:
Q: As I think about the roll out of this Graduate Plus federal loan product could you talk me through how you see that playing out and what the benefits are - why someone would elect to go with a private student loan that you offer in the graduate market is it really something you’ll be targeting to just the very best credits or do you think it’ll be competitive across the spectrum.
A: Good question. It’s still too early to judge the impact of Grad Plus. It does provide an alternative to private student loans at a fixed rate. For some borrows with strong credit, private student loans will be a better deal. Remember this is risk based pricing, so the better the quality of credit the better the rate. Our better tier rates are lower than the fixed rate of the Grad Plus. Remember, also that Grad Plus is 10 years term and private student loans are 20 year. We believe that Grad Plus will have an impact on our volume, we also believe that many borrowers will continue to look at private student loans as a solution. Generally lower FICO score borrowers will get better rates with Grad Plus.
Q: What % of your volume have been graduate students?
A: 15% [more]
The Southern Christian Leadership Conference citied CCRT as one of the companies it would partner with CCRT to "examine solutions to help Americans achieve and maintain 'prime credit scores'. - 11/22/06 [more]
Interesting: a lot of components come from sole source providers - risky if one of them is not able to meet it's obligations
the air chamber manufacturer is in Eastern Europe with agreement through 2011, but SCSS carries a 6 weeks of inventory of this item which appears to be the only item (raw material) they carry of any significance
In 2006, 45,000 new customers purchased beds after receiving referrals from our Comfort Club members and existing owners purchased 35,000 additional beds or 152MM or 10% and 8% of total sales respectively Using the price of their most popular model: the 5000 queen selling for $1,900. [more]