My Forecast for Nicholas Financial’s Earnings

Tomorrow Nicholas Financial ($NICK) is due to report earnings for their fiscal second quarter. I continue to believe this is a remarkably undervalued company.

Let’s go over their business. NICK makes loans for the used car market. Unfortunately, investors seem to think that NICK is just another subprime lender, hence the dirt-cheap valuation.

This view is simply incorrect. NICK is very well run and the company doesn’t dump off its loans but instead holds them to maturity.

I have some concerns about NICK’s business but they’re not due to the quality of the company’s portfolio. That still remains very high. The issue going forward is really about growth. It’s going to get much harder for them to get originations. Competition is heating up.

The good news, and there’s lots of it, is that NICK should still churn out the profits. The company can borrow very cheaply (LIBOR +300) and lend out at 25% or more. Receivables are running at about $270 million or so and debt is around $120 million. That should translate into revenue of roughly $17 million, give or take, for the quarter.

By my numbers, NICK should report earnings of 44 or 46 cents per share tomorrow. That would mean the company has earned 88 to 90 cents per share in the first half of their fiscal year, and $1.66 to $1.68 for the last four quarters. That’s outstanding.

I’ve said that NICK could earn as much as $1.70 per share for this calendar year. Now I think NICK can earn $1.75 per share for this calendar year. If so, this means that NICK is going for 5.76 times this year’s earnings which is less than half the multiple for the S&P 500.

I think NICK is at least a $17 stock that’s currently going for $10.

I should add that management also seems concerned about NICK’s ability to grow rapidly and that may be the reason behind the 10-cent quarterly dividend. I can’t say I’m a huge fan of it, but neither am I opposed to it. There’s nothing wrong with handing out some profits. NICK is an excellent stock.

Posted by on October 26th, 2011 at 3:43 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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