Nicholas Financial, Inc. (NASDAQ:NICK)

CAPS Rating: 3 out of 5

The Company is a consumer finance company engaged in acquiring and servicing retail installment sales contracts for purchases of new and used automobiles and light trucks.

Recs

10
Player Avatar Swizzled (< 20) Submitted: 2/5/2007 7:43:23 PM : Outperform Start Price: $9.17 NICK Score: -2.66

This managment team has grown earnings in 66 out of the last 67 quarters. Umm, that's 16 years. Over last 8 years EPS growth has averaged approx 24%, and is showing no signs of decreasing. Mkt cap is just over $100mil, have only 46 branches so room to grow exponetially, CEO owns a large position, CFO been with the company since 1988, and market that they serve is highly fragmented and enormous in size. Amazing part is that current PE is 10 which is less than half of the 24% recent rate of growth. Some risks are rising interest rates, poor economy and concentration of essential skills in the top two managers. However, this company is priced for virtually no growth, vs recent and long term growth over 20%. There is no forseeable cap on their growth either. This is a really outstanding opportunity. I think these shares could be worth at lease twice what they currently trade for.

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Member Avatar bigscottowski (94.70) Submitted: 2/7/2007 12:56:07 PM
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Unfortunately recent growth hasn't been as high as previous growth so the stock is not as undervalued as it would appear, although there is always the potential for the company to pick up steam, which would be a boon to owners (like me). I think that the shares are at least priced to perfection if not undervalued, however, and I see a lot more upside possible with very little risk of downside - especially given that 8 year record as you say.

People worried about interest rates a few years back on this one but it doesn't seem to affect the stock at all. Listen, you're talking about a company that is making loans at close to 20% to people with bad credit on automobiles. The underlying interest rate set by the fed has very little contact with business as a result.

If the company can get a handle on expansion and increase earnings growth a little we're in for a nice surprise from here. I would recommend aggressive buying.

Member Avatar 8thedog (27.36) Submitted: 2/11/2007 12:37:43 PM
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I think I am in overall agreement that this stock is a good bet given the continued health of the economy. But I would not downplay the impact of potential sustained increases in the fed rate too much. If the rate starts to go up, so will the rate at which NICK pays on its line of credit. It is my understanding that this is how it funds operations. Given the caps at which it can charge interest on its loans, this could curtail profits. And even if there were no cap, sooner or later even the most desperate borrowers would be priced out of the market.

Member Avatar Swizzled (< 20) Submitted: 2/19/2007 4:41:50 PM
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That is certainly a good point. I'm not up to speed on the amount of swapping they get into, but I do think that they are not entirely exposed to this.

The important part for me is that 5/10 years from now they are going to have expanded their branch network considerably, and are going to have a much large loan asset balance. The stock is valued as though there is not going to be any growth going forward. I find it hard to imagine that there isn't going to be significant growth even if their net interest margins are compressed somewhat.

They may trend flat for a period or even have a decrease in net income for the first time in 16 years, and the market would hammer them for this. I think this would be over estimating the most recent info and forgetting that growth here is going to continue, but perhaps in a more lumpy fashion than it has historically.

A 10 PE for a company that has consistently grown at 20%, with all kinds of room for future growth and managment that is invested in the company and seems to be excellent.

Focus on the long term and I think this is as fat a pitch as I've seen in a while.

Member Avatar bigscottowski (94.70) Submitted: 2/20/2007 1:26:15 PM
Recs: 0

I agree. When things are boring and nobody cares it's the time to get in. I've been following this stock for a long time and got in sometime around $4 for my first buy, and then again at 6. Then it had a run-up and there was a lot of buzz. I really like the sleepy sag in the stock price that has me down 30% on my pick - because it's a chance to put real money to work. Fingers crossed on the perfect Lynch stock. A year from now when we're looking at 20 I will be happy.

Member Avatar Swizzled (< 20) Submitted: 2/21/2007 1:01:40 PM
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One thing that did concern me a little is that I came across a rumor that the CFO Finkenbrink might be leaving the company.

It was not from any sort of credible source, but was wondering if anyone else who follows the stock had seen/heard anything ?

Member Avatar jsqlong (< 20) Submitted: 6/12/2007 11:47:06 AM
Recs: 0

Hi. Thanks for your very insight comments.
Although I am impressed by its financials (just look at its increasing profit margin!), I am worried about is core business - offers financing programs to purchasers of new and used cars and trucks who do not meet the credit standards of traditional lenders, such as banks and credit unions. With the looming threat of a downturn, what will happen? Will its lenders be able to pay back loans? Or will a poor economy stimulate its business, as there will be even MORE purchases who do not meet credit standards of banks then who will have to turn to financers like NICK?
Personally, I like NICK. Even during the down period in 2001 - 2003, it managed to maintain a good profit margin.

Member Avatar SH2F088 (89.98) Submitted: 6/22/2007 12:46:32 AM
Recs: 0

Re-examined the numbers today. Still looking good. 16 qtrs of growth unbroken through 31Mar07. Next report coming up may break the streak, though. Their Q1 (Apr-Jun) has historically been weak, but last year was strong and they suffered a small sequential decline to Q2 (Q1=0.29 --> Q2 = 0.27). Q4 was back to 0.29, so we will see. The sub-prime problem with houses may have affected NICK and Q1 should tell the tale.

Even so, I expect the hit to be small and their growth (consistent 30% for over 9 yrs!) to continue. Historically they have ranged between PEs of 3 - 13 (recently 9-13), which is undervaluing their consistent results and superior growth. This is a good investment with a modest sub-prime problem and a great one without it. Price target 14 - 20. With steady, historical earnings growth 20 will be undervalued a year from now.

Member Avatar SH2F088 (89.98) Submitted: 8/9/2007 8:55:12 PM
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Turns out I was right. Q1 fell to $0.27. If we assume they keep that level for the year they will make 1.09 (also the more accurate analyst's estimate for this year) which multiplied by last years lowest P/E ratio gives us a conservative target price of $9.81. Any resumed growth or more typical multiples would only drive the price higher.

Member Avatar bigscottowski (94.70) Submitted: 8/30/2007 10:47:19 AM
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I'm a lot less bullish on this than I was a year ago. I think my reasoning about the interest rate not affecting low-credit score car buyers was simply wrong. This stock is going to take a lot of patience, but if things turn out right, there will be a golden buying opportunity down the road. I would keep my eye on that CEO position, insider trades (very important for this stock), and default rates. But I'm pretty pessimistic about the economy at the moment.

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