But isn’t it really the reverse?  First comes the future . . . which then becomes, for less than an instant, the present . . . and then, for all time, the past.*

*No illegal substances of any kind were harmed in the making of this item.


From Tom Brown’s blog Friday on our growth stock selling under 10 times trailing 12-month earnings and perhaps 6 or 7 times the coming year’s:

FRANCHISE PLAYER: For years, the bears’ big complaint about First Marblehead has been that that the company doesn’t contribute anything of material value to the student-loan origination process. It doesn’t lend (the bank partners do); it doesn’t service (third-party servicers do); it doesn’t guarantee (TERI does), and on and on. Eventually, therefore, Marblehead will be disintermediated by its partners and its business will disappear. Simple! To back up this line of thinking, critics pointed in instructive contrast to Sallie Mae, which originates a substantial portion of its business directly, without involvement of partners, and thus has its own solid, standalone franchise.

I happen to think that objection is nonsense, of course. Marblehead has considerable underwriting and product development expertise its competitors and partners can’t duplicate. If the company weren’t part of the lending process, its partners wouldn’t be able to originate student loans nearly as profitably as they do. (If you want to know why, click here and here.)

Anyway, it’s now come to the point where the bears aren’t just wrong on this point as a matter of judgment. They’re wrong as a matter of fact.  In 2006, the portion of loans Sallie Mae originated directly, via its internal brand, came to just 38% of total originations. But Marblehead now originates on its own,too. In fiscal 2007 (which ended in June) the portion of loans the company originated directly, via its own brands came to 12%–and that number is growing very, very quickly. In the fiscal fourth quarter, for example, fully 20% of Marblehead-facilitated originations came via its in-house brands. My guess is that in-house originations will come in at close to 20% of the total again this quarter. That implies roughly $400 million in in-house originations for the quarter, nearly equally to Marblehead’s in-house originations for all of fiscal 2007.

(Marblehead’s in-house efforts are a win-win for it and its partners by the way. The business is profitable in its own right and, more important, is a useful testing ground in which the company can come up with winning strategies it can then share with its partners.)

My bottom line: the growth of Marblehead’s in-house brands means that the company’s franchise value is increasing rapidly. Sallie, by contrast, is about to be saddled with $16 billion of debt and is suddenly in the midst of a legal and regulatory environment not nearly as benign as it was not so long ago.

Who’s got the better franchise now?

☞ Full disclosure:  I have a lot of this one, hoping for a triple over the next few years.  Even if its multiple didn’t expand anywhere close to a “normal” growth-stock multiple – Sallie Mae sells at 19 times earnings, for example – its earnings and dividend are growing so fast, we could still get a triple.  (Caution: I know some the shorts.  They’re real smart.  I think they’ll be wrong, but I have only made this bet with money I can truly afford to lose.)

Fuller disclosure (and very substantially riskier still):  I also own a bunch of FMD options, hoping to see the stock rise a few more points this week, as some of the short-sellers – in the wake of last week’s unexpectedly large securitization – decide there are easier ways to make money than to short a fast-growing company selling at 6 or 7 times earnings.  Do not try this at home; but if it works out, I’ll finally be able to get Charles that new salad spinner he’s had his eye on.


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