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Monday, October 03, 2005

First Investors Financial Services Group (FIFS)

I'm not going to have time to pick this one apart. Perhaps later. It's an interesting example that's worth the effort, even if it doesn't turn out to be an investment simply because of the wide difference between the accounting results and the cash flow results over a 5 year period.

FIFS (very lame website) is involved in sub-prime auto loans. I wish I had seen this one earlier, before the most recent quarter results came out.

Their assets are almost entirely the receivables held for investment (10 times greater than the next largest asset). On the liabilities side, it's almost entirely debt. They run at nearly a 10-to-1 debt to equity ratio, making it halfway to the leverage of a bank! In my mind, the gold standard for subprime auto lenders is Nicholas Financial (NICK) which is only about 2.5-to-1.

NICK has operating margins of about 42% vs about 2% for FIFS, but a lot of this difference is due to what seems to be massive provisions at FIFS. Even with NICK's provisions, they end up having to return a lot of that back into income after the static pool containing that loan is sufficiently drained.

FIFS has a huge difference between income and cash flow for years.
earnings vs cash flow
2001: $52K -- $12.8 million
2002: ($309K) -- $10.2 million
2003: $333K -- $17.4 million
2004: $34K -- $16.6 million
2005: $683K -- $15.3 million
capex was very small during these years.

On April 30, 2000, there were 5.6 million shares.

If you look at changes in equity, 2000 started with $28.9 million in equity. 2000 had a small increase of $226K, mostly from warrants.

2001 next year was dominated by a cumulative effect of accounting change which wiped out $2.5 million in equity, offset by a reclassification of earnings adding $820K. $515K for treasury stock purchases. The net change was about a $2.5 million drop in equity.

2002 had the $333K earnings, but also another reclassification of earnings adding $828K. $1.3 million treasury stock repurchases brought the equity back to a net change of essentially zero.

2003 had the $34K earnings, but yet another reclassification of earnings of $897K. Another net $120K in treasury stock repurchases and equity ended up about a million.

2004 had the $684K earnings. A huge $2.5 million treasury stock repurchases. Equity ended down about 2 million. Equity ended at $25.5 million.

Ending on April 30, 2005 with 5.6 million shares, but 1.17 million of those are treasury stock (purchased at an average price of $3.81 each).

If the company hadn't repurchased shares, equity would have ended at $30 million which would represent an increase in equity of $1.08 million over a 5 year period (or about $216K per year). Ignoring the effects of compounding, this would represent 3.9 cents per share increase in equity per year.

This whole sequence included the $2.5 million drop in equity in 2001 which was a cumulative effect from multiple years. If we start in 2002, the effective change in equity would be about $3.8 million over a 3 year period or about 23 cents a share per year.

I believe this would be a difficult business to understand.

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