Really Good April 27, 2007March 6, 2017 REALLY GOOD CANDIDATES Did you watch the debate? I am enthusiastically neutral among all our fine Democratic candidates. GIVE TO THE DNC, OR I’LL SHOOT YOUR DOG If you want to help widen our lead in Congress and win back the White House, click here. REALLY GOOD INVESTMENT ADVICE From Saturday Night Live – click here: ‘Don’t Buy Stuff You Can’t Afford.’ That would include shares of First Marblehead, if you can’t afford the risk: FMD You could listen to last evening’s earnings call, or you could just read my guru’s summary: Third quarter net income of $71 million and income per diluted share of $.75, which included a negative adjustment of 11 cents/diluted share due to changes in some of the underlying assumptions re: the value of their service receivables (residual value of their securitizations), were up 20% and 21% respectively year over year. And for the first three quarters of the fiscal year, net income and diluted income per share are up 78% and 81% respectively year over year. The variance in the magnitude of the quarterly vs. YTD growth rates is largely a function of timing refinements in their quarterly securitization calendar. I would expect 4th quarter income growth to normalize in the 30-40% range. The residual markdown (based on a combination of a slight increase in the anticipated prepayment rate and a slight improvement in the discount rate) was relatively minor, but nevertheless a surprise which may open the door for some of the naysayers to naysay a bit. In the grand scheme of things it should be considered a minor distraction. Without it, FMD would have exceeded very high earnings expectations by 2-3 cents/share. With this change in performance assumptions, there is also some potential for future securitization margins to be dinged by a few percentage points, but with the gross margins and absolute growth rates in this business, it hardly makes a difference. A red herring. Management spent some time discussing client concentration, pointing out that JPM and BofA have gone from 65% of their bookings two years ago, to 44% today. They also said that they expected this diversification trend to continue. They briefly touched on the SLM private equity deal…only to repeat that SLM, JPM, BofA and FMD are all on record saying that they see no changes in current business relationships in the near to medium term. Another point of discussion was the shareholder friendly dividend and share repurchase programs. At the end of the quarter, FMD had $290 million in cash available to be deployed against these two initiatives (and no debt). CEO Kopniskey reminded all on the call that FMD had raised their cash dividend by at least 20% sequentially in each of the last three quarters. He also reminded listeners that the board had recently approved a 10 million share buyback (90 million shares outstanding). In summary, the fundamental growth and performance story is still very much intact. Client concentration is being methodically mitigated, conservative changes in residual valuation assumptions provide an even larger margin of safety against any future underperformance, and shareholder friendly dividend increases and share buybacks have demonstrated traction. In my view, FMD remains a compelling longterm buy — especially at these prices. ☞ I hope he’s right, as I own a whole bunch of this. But there are no sure things in the stock market.