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Nicholas Financial (NICK)


bookie71
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  • 4 years later...

Has anyone been following this company? Seems like a very interesting special situation-ish company.

The company recently closed a dutch tender, reducing its share count by 38%. Note that 80% of shares were tendered, and combined with the thin liquidity (average daily volume of ~50k), this seems to be the perfect setup for non-fundamental selling, as event-driven guys sell.

This company seems to have all three characteristic of a value investment, unloved (subprime auto lending), unknown (50k average daily volume, adjusted market cap < $100m) and special situation (dutch tender).

 

Now to the interesting part, valuation.

 

The Dec 2014 10Q shows NICK has $155m in tangible capital. Since the company drew $70m from its credit lines for the tender, the new tangible capital is $85m ($155m - $70m).

Pre-tender, the company had 12.3m in share outstanding. Post-tender, 4.7m share were bought back ($70m/$14.86 per share), leaving the new share out 7.7m.

Currently trading @ $12.64 would mean that the P/TBV of this company is ~1.15x.

 

Downside seems pretty protected. It is interesting to know that the company recently rejected a $16 offer for the company.

 

Now, lets talk about the UPSIDE. Always exciting to talk about the upside.

 

Over the LTM, the company generated $15.9m in net income, which includes a non-tax-deductible (although it can be deducted in the later period) $1m professional fees. This fees are the fees relating to the potential sale of the business. This means the adjusted net income of this business is $16.9m or $2.20 per share ($16.9m/7.7m).

MEANING, this company is trading at 5.75x P/E. Run rate margin is approximately at average margin. So normalized P/E should be around the area too.

 

While I like to use comparable (CACC trading at 17x P/E), i think the business economics is just too different. NICK seems to have a more stringent underwriting threshold, combining quantitative factors (like most auto lenders do) and qualitative factors (interviewing the applicant). The result is a slower growth rate, as compared to CACC, but a more stable net profit margin (CACC STDEV % AVG is ~48%, compared to NICK's 20%).

 

Thoughts?

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While I like to use comparable (CACC trading at 17x P/E), i think the business economics is just too different. NICK seems to have a more stringent underwriting threshold, combining quantitative factors (like most auto lenders do) and qualitative factors (interviewing the applicant). The result is a slower growth rate, as compared to CACC, but a more stable net profit margin (CACC STDEV % AVG is ~48%, compared to NICK's 20%).

 

Thoughts?

 

Interesting observation considering some emails I've received recently.  I've been included on a thread that's debating why NICK's credit quality has dropped and why it's getting worse.  I would say they have loosened significantly in the past few years, and that might be cause for concern, or maybe not.

 

I always appreciate the different perspectives, that's what makes a market!

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While I like to use comparable (CACC trading at 17x P/E), i think the business economics is just too different. NICK seems to have a more stringent underwriting threshold, combining quantitative factors (like most auto lenders do) and qualitative factors (interviewing the applicant). The result is a slower growth rate, as compared to CACC, but a more stable net profit margin (CACC STDEV % AVG is ~48%, compared to NICK's 20%).

 

Thoughts?

 

Interesting observation considering some emails I've received recently.  I've been included on a thread that's debating why NICK's credit quality has dropped and why it's getting worse.  I would say they have loosened significantly in the past few years, and that might be cause for concern, or maybe not.

 

I always appreciate the different perspectives, that's what makes a market!

 

Can you elaborate further on this point? The drop in credit quality. What metrics are you referring to?

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While I like to use comparable (CACC trading at 17x P/E), i think the business economics is just too different. NICK seems to have a more stringent underwriting threshold, combining quantitative factors (like most auto lenders do) and qualitative factors (interviewing the applicant). The result is a slower growth rate, as compared to CACC, but a more stable net profit margin (CACC STDEV % AVG is ~48%, compared to NICK's 20%).

 

Thoughts?

 

Interesting observation considering some emails I've received recently.  I've been included on a thread that's debating why NICK's credit quality has dropped and why it's getting worse.  I would say they have loosened significantly in the past few years, and that might be cause for concern, or maybe not.

 

I always appreciate the different perspectives, that's what makes a market!

 

Can you elaborate further on this point? The drop in credit quality. What metrics are you referring to?

 

Lets shift the conversation to the other thread.

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/nick-nicholas-financial/

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