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Saturday, May 17, 2008

Nicholas Financial (NICK) Q4 results

Nicholas Financial (combined links) released their Q4 results for the period ending March 31, 2008. I found the results interesting. Since the business is not really seasonal, I'll also be comparing to Q3 results.

First off, NICK is in sub-prime auto lending so we would expect bad results, perhaps a lot of people might expect catastrophic results.

We can't put too much weight on net income since that's fairly easy to manipulate if NICK ever felt like doing so. But let's look at the income statement anyway.

Revenue increased slightly yoy and qoq.
Operating expenses increased 11% yoy and 8% qoq.
Provision for credit losses has been increasing (as we would expect, but is it enough?).

Provision for credit losses:
Q3 last year: $1.2 million
Q4 last year: $0.8 million
Q3 this year: $2.5 million
Q4 this year: $2.5+ million

Interest expense Q4 increased very slightly from last year.

Income tax expense:
Q3 last year: $1.7 million
Q4 last year: $1.8 million
Q3 this year: $1.3 million
Q4 this year: $1.3 million

Net income:
Q3 last year: $2.8 million
Q4 last year: $3.0 million
Q3 this year: $2.2 million
Q4 this year: $2.1 million

Net income per diluted share: 20 cents for this Q4.


Now let's look at the condensed balance sheet
Cash increased yoy to $2.3 million but decreased qoq from $4.7 million.
Finance receivables is at $179 million, up from $172 million qoq ($164 million yoy)
Nearly all of the assets are subprime auto loans.

Liabilities are nearly all a line of credit. The LOC is essentially unchanged from the prior quarter. It's slightly more drawn than a year ago.
Debt to equity is 1.27 this quarter. It was 1.36 last year. It was 1.30 last quarter.


Now let's get to the ratios and rates.
The weighted ave contract interest rate is 24.5%, up slightly from 24.1% qoq and same yoy.
Ave cost of borrowed funds was 5.87%, down from 6.51% qoq and 6.32% yoy.
Provision for credit losses as a % of finance receivables was 5.20% which was down from 5.13% qoq, but up from 1.84% yoy. You can see they cranked up the provisions during the past year.
Net charge-offs divided by liquidation was 9.96% which was DOWN from 10.35% qoq, but obviously up from 6.19% yoy. Are things improving?
Net charge-offs divided by total receivables beyond unearned interest was 8.98% which was DOWN from 9.51% qoq, but obviously up from 5.82% yoy.

Delinquencies:


March 31,


2008



2007


Contracts













Gross balance outstanding


$269,985,960



$247,002,051















Delinquencies













30 to 59 days


$6,747,067
2.50%
$4,072,821
1.65%

60 to 89 days



1,798,287
0.66%

921,097
0.37%

90 + days



831,647
0.31%

506,433
0.21%













Total delinquencies


$9,377,001
3.47%
$5,500,351
2.23%













Direct Loans













Gross balance outstanding


$10,161,920



$9,990,060















Delinquencies













30 to 59 days


$181,244
1.79%
$65,982
0.66%

60 to 89 days



51,974
0.51%

12,024
0.12%

90 + days



58,065
0.57%

21,476
0.22%













Total delinquencies


$291,283
2.87%
$99,482
1.00%
















December 31, 2007

December 31, 2006
Contracts











Gross balance outstanding


$256,278,730



$233,992,372







Delinquencies











30 to 59 days


$8,908,945
3.48%
$4,942,628
2.11%

60 to 89 days



2,933,134
1.14%

1,682,993
0.72%

90 + days



1,402,143
0.55%

691,092
0.30%













Total delinquencies


$13,244,222
5.17%
$7,316,713
3.13%













Direct Loans











Gross balance outstanding


$10,989,625



$10,052,202







Delinquencies











30 to 59 days


$212,084
1.93%
$94,912
0.95%

60 to 89 days



77,503
0.71%

55,635
0.55%

90 + days



91,271
0.83%

25,482
0.25%













Total delinquencies


$380,858
3.47%
$176,029
1.75%














If we look at the changes in the last 3 months, we see something interesting.
Changes in delinquencies (purchased contracts) from Dec 31, 2007 to Mar 31, 2008:
30 to 59 days: decreased by $2.16 million
60 to 89 days: decreased by $1.14 million
90+ days: decreased by $0.57 million

Every single category in both purchased contracts and direct loans shows the situation improving from Q3. A lot of people believe the consumer situation will get a lot worse (meaning that this would be just a temprary uptick), but I disagree. This is a big assumption, but it's one I believe is true and the evidence I've seen points more to improvement.

So if I believe this is the worst, then 20 cents per share earnings is as bad as it gets. With a non-seasonal business, this would translate to a value of perhaps $12 per share if things remain this bad. My own estimate is that NICK is worth about $20 or more per share. For years I've been saying that this stock won't reach full value until after the whole subprime issue plays out. Well, we may see that happen before too long.


CONCLUSION

I view these results as excellent news and I continue to own the stock.

Comments:
Bruce, I own NICK, too. I bought at $8.00 and am considering buying more. There are several things I like about NICK. It is run by the same folks that originally started it. It understands risk and reward, something the big banks lost sight of during the recent sub-prime mess. NICK is a potential acquisition candidate. Yes, it is a potential acquisition candidate for someone like Bank of America or BB&T. Here's my rationale: banks need to loan money to make money and NICK is an excellent place for them to take 3.5% deposit money and turn it over at 20+%. We saw this before during the late 1980s - early 1990s where banks bought financing companies. We could see it again within a year or two as banks emerge from this credit crisis hungry for places where they can park a lot of money with good risk/reward returns.
Progress is Everything
 
Never give up! never surrender. Busby Seo Challenge
 
thats pretty great, someday i can do that thing
 
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