But first . . .
INSTRUCTIONS FOR YOUR GIGAPOD II
I’m not saying you have a Spire GigaPod II Hard Drive Enclosure, or even that I know what it is. But you can get one here, and when it comes, there will instructions that read, in full:
HDD Assembles Elucidation
1. Make an effort to press in the direction that arrowhead point the plastics lock button up. such as picture A
2. Heading up the upper cover to turn to turn over to rise. such as picture B
3. Cover up and down to separate then and completely. such as picture C
Is good with machine plank according to the right method conjunction the hard dish, lock the tight and HDD, cover the upper cover, can immediately trust the usage.
☞ Now you know. (Sorry I lack the techspertise to include pictures A, B, and C – you probably don’t need them.)
And now . . .
THE GOOD NEWS
A nice write-up of WheelTug here, in the Times of London on Line. Underwhelmed, BOREF stock traded down to $9.50 on volume of 100 shares. But tell me what’s wrong with this logic:
- The pressure to get WheelTug working, for real, in the nosewheels of thousands of commercial jets, will be considerable, both because of the potential profit to Delta and other airlines (and a marginally improved passenger experience) and because of the environmental appeal cited in the article.
- The effort could fail. But since a prototype already drove a fully loaded 767 around a desert airstrip for hours, as attested to by Boeing and Air Canada’s chief pilot, it might not.
And so I hold on for the ride and the dream. (I’m still reading Atlas Shrugged. Thirty-five miles to go.)
THE BAD NEWS
FMD dropped 22% yesterday, down $9.83 to $34.60, having already fallen off sharply from its $57.56 high in January (albeit still up from $25.50 where some of us first bought it).
Unlike BOREF, which traded 100 shares yesterday, FMD traded 26 million.
So now what? My FMD guru, who, like me, owns a lot of shares (but who, unlike me, owns more), woke up cheerily on news that Sally Mae, the big student loan company, was being acquired at a 50% premium in a private equity deal. That would get the market thinking about how valuable the student loan business can be; and, since FMD is in the student loan business, up would bounce its stock. Or so he figured. Maybe it would open $5 higher?
Instead, FMD dropped nearly $14 in the first half hour of trading. It seems that Sally Mae was acquired not just by any old private equity firm, but by some private equity firms in partnership with the two banks that are FMD’s biggest clients: JPMorgan and Bank of America. (And who, the fear is, may now become its biggest competitors.)
So here is his analysis. Executive summary: nothing is sure in the stock market, but he hasn’t sold a single share.
After hearing about the SLM buyout at $60 early this morning – a nice 50% premium over last Thursday’s price – I happily turned on my computer to check and see what kind of upside pop FMD had enjoyed – only to have my chin hit the floor when I saw the stock down almost 30%. The volatility around this stock drives me nuts. However, I’ve spent some time thinking about today’s developments and do not yet see a compelling reason to change my assessment – and in some ways, with today’s dramatic drop, the stock could be considered substantively more interesting (volatility aside!).
So where are we today? As you will recall, despite extraordinary growth in loans, revenues, profits and (importantly) cashflow over the last three years or so, the company has been under vigorous attack from shortsellers who have variously argued that 1) FMD’s margins and loan growth are unsustainable; 2) their client roster is too concentrated – leaving them vulnerable to one or more of their top client banks taking their business in-house or renegotiating for significantly improved financial terms; and 3) the value of the residual flows from their securitizations are overstated due to misunderstood credit and prepayment risk – creating potential for material markdowns and earnings challenges in the future.
In response to these enumerated concerns, bulls argue:
1) In the first three quarters of fiscal 2007, loan securitization volume is up roughly 50%, while margins are expanding. For the first two quarters of fiscal 2007 (Q3 to be released in less than 2 weeks), revenues are up 87%, net income is up 110% and diluted earnings per share are up 115%. This kind of growth on a sustained basis is highly unusual – and a strong demonstration of the tangible value that FMD brings to its bank partners and end customers.
2) FMD has been actively seeking to expand their roster of client bank relationships, with some demonstrated success. There have been a number of significant signings over the last few quarters – Key Bank and GE among them. However, business concentration with their two largest clients, JPM and BofA, remains around 40% – which can only mean that these two banks are actually growing their relationship with FMD, not preparing to exit. Also, JPM recently signed a longterm services deal with FMD that carries through 2010 (conditions of the contract are obviously proprietary). BofA does have the ability to end their relationship with FMD upon 90 days notice (starting mid-year).
3) Conjecture on the ultimate residual value of the FMD securitization vintages will most likely continue for several more years until they age more definitively. However, no one but FMD has the dataset (historical TERI database) with which to analyze their current performance – the key to their competitive advantage. The important thing to consider here is that FMD must — on a quarterly basis – persuade 1) the rating agencies that their forecasts of customer performance are accurate and reasonable, or they won’t be able to access their advantageous securitization terms; and 2) their external auditors that their assumptions underlying their residual valuations are reasonable. To date, there has been no deterioration on either of these dimensions.
Today’s news that SLM was being bought out by a partnership made up of several private equity firms, along with JPM and BofA as significant minority stakeholders seems to have reignited the concentration risk argument (#2 above) – fueling the selloff. While this development certainly merits attention over the longterm, I am less concerned in the near and medium term and still believe that FMD will continue to deliver substantial investment returns (even more so from today’s depressed closing price) . . . because:
a) FMD is the leader in the direct-to-consumer (DTC, or high margin channels), private student lending space, delivering significant, visible value to their bank partners. SLM’s expertise is in the federally guaranteed FFELP loan business and distributing private student loans through on-campus financial aid offices (significantly lower margin channel). SLM just does not currently have the value package to offer JPM and BofA (or any other bank partner, for that matter) to compete with FMD in the fast growing, highly profitable DTC business. This is not a commodity business and there is a clear difference in capabilities and performance. It seems very unlikely that either JPM or BofA would deteriorate the operating performance of a successful business in order to subsidize the earnings of a business in which they own a minority position.
b) Even if the worst possible scenario actually occurred – JPM and BofA immediately withdrew all of their private lending business (practically and legally very unlikely), FMD’s current growth trajectory would allow them to make up the complete loss in less than a year. Again …in the worst possible scenario, you still have a company sustainably growing forward earnings in excess of 35% per year, with a forward PE multiple of 8 – producing an absurdly low PEG [price earnings ratio as a percentage of earnings growth rate] of less than 25%.
Given point (a), if a wind-down did eventually happen, it would most likely happen slowly and methodically – giving FMD ample opportunity to capably manage through it without materially stressing operating performance.
c) SLM will most likely not evolve into a capable DTC private loan competitor in the near or medium term, now that they are newly burdened by a very heavy debt load and most likely paralyzed by difficult cost cutting decisions. FMD is cash rich and nimble, with many productive growth initiatives already in place: it’s very likely that they will extend their already impressive lead in their business space.
d) For what it’s worth, JPM has gone on record to say that they see no imminent changes in their relationship with FMD; Jack Kopniskey, the FMD CEO has publicly said that he sees no changes to current business arrangements; BofA, from what I can tell, has not commented.
Quote of the Day
Market economics as currently practiced often ... includes only what's countable, not what counts.~Rocky Mountain Institute
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