A Favorite Stock, NICK

[DesertCat]

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Contract delinquencies at Sept. 30 2005 were $3,876,429.
Contract delinquencies at Sept. 30 2005 were $6,196,410.

(6,196,410 - 3,876,429)/3.876.429 = 59.8%.

How did you arrive at a 30% increase in delinquencies?

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Ok you were using absolute dollars, I was using delinquencies as a percentage of outstanding contracts, which went from 1.99% to 2.72%, which is an increase of 36.7%, not 30%.

And your observation about florida is likely right on target. I'm seeing similar things from another company I investigated this week, a building supply products company where sales in most of the south are solid, but in Florida sales have been very weak.

[yellowbastard]

Buffett constantly talks about finding businesses that serve a repetitive need and have a durable competitive advantage that will cause the company to produce monopoly like profits in the long run. NICK does serve a repetitive need, buying auto debt, but what is it's durable competitive advantage? If I was a used car dealer and wanted to sell off some outstanding debt I don't see any reason why I would accept a lower bid from NICK than a slightly higher bid from one of NICK's competitors.

[icetonez]

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Buffett constantly talks about finding businesses that serve a repetitive need and have a durable competitive advantage that will cause the company to produce monopoly like profits in the long run. NICK does serve a repetitive need, buying auto debt, but what is it's durable competitive advantage? If I was a used car dealer and wanted to sell off some outstanding debt I don't see any reason why I would accept a lower bid from NICK than a slightly higher bid from one of NICK's competitors.

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Competitors use credit scoring as the main determinant of credit risk, allowing their central offices to cost-effectively process high volumes of loan applications. Nicholas feels credit scoring alone is not the most accurate gauge of individual client risk as two clients with identical credit ratings can offer much different risk levels. Nicholas to measure risk through factors that supplement raw credit scores, such as income level, stability, “life” trend, etc. This allows NICK to “cherry pick” clients who have lower risk than credit scores alone would indicate. Even then, Nicholas turns down 85% of potential clients.

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My understanding from DC's writeup is that NICK doesn't offer a lower bid to dealers compared to their competetors. They offer the same bid, and gain their advantage by taking a more indepth look at the invididual credit risk.

[DesertCat]

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Buffett constantly talks about finding businesses that serve a repetitive need and have a durable competitive advantage that will cause the company to produce monopoly like profits in the long run. NICK does serve a repetitive need, buying auto debt, but what is it's durable competitive advantage? If I was a used car dealer and wanted to sell off some outstanding debt I don't see any reason why I would accept a lower bid from NICK than a slightly higher bid from one of NICK's competitors.

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What I believe to be NICK's competitive barrier is their unique credit scoring and local branch offices. This "hands on" approach allow them to better determine which borrowers are lower risk, and which dealers offer better paper. And they can also do a better job of follow-up with borrowers to minimize the default ratio. Whereas the "big guys" might followup with a call (that you duck) or a letter (that you toss) when a payment is late, the NICK guys know where you work, who your references are, and they'll immediately want to talk to you. The big guys typically outsource vehicle recovery, whereas a NICK manager may do it himself.

This advantage allows NICK to "pay more" for a dealers client knowing that the client is a better risk than traditional scoring indicates, and avoid writing loans to clients who are worse. A dealer may not be able to get anyone to write a loan to a customer except NICK, if their credit scores are too low.

It's not a traditional "moat", but it seems very effective. And it's difficult to duplicate, because competitors don't want to invest the time and capital building their own branch office network. Their approaches are heavy on automation, which produces lower costs, but also higher losses.

[yellowbastard]

Very interesting. I feel like I learned a lot in this thread. Got anymore companies we can look at?

[Scorpion Man]

DC

You seeing any of this bad subprime mortgage data making the rounds? You changing your take on this one at all at this point in the cycle?

By the way....i have some HF friends who have been buying KKD FWIW.

[DesertCat]

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DC

You seeing any of this bad subprime mortgage data making the rounds? You changing your take on this one at all at this point in the cycle?


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Nope and nope. I'm pretty confident about NICK's underwriting standards. My thesis is they are dealing with the fallout fromt the real estate bubble bursting in Florida, which do to having a bunch of fraudulant speculation, is way over built. The construction workers that NICK financed are having big troubles now. I don't know how long it will take, but expect them to eventually work through those issues and continue growing as before. As long as we don't get the double whammy of a recession:

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By the way....i have some HF friends who have been buying KKD FWIW.

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I hope it works out for them. But I think it's insanely overpriced. And they are still shrinking, they shut another store yesterday. I bought some more 08 $10 puts earlier this month, but am primarily letting my positions unwind and taking my losses.

[Cubswin]

DC

Thanks for posting your insight on this stock. I'm defintely a newbie when it comes to stocks but tried to educate myself by reading Graham earlier this month. I have since read it a second time.

I've been keeping an eye out for NICK and also ADM and ACH. Both ADM and ACH had a nice little bump today but I didnt have a position. However, I did buy NICK this evening. My first purchase in the ROTH I just set up. Time to start planning where to put my 2007 ROTH contribution [img]/images/graemlins/smile.gif[/img]

[DesertCat]

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However, I did buy NICK this evening. My first purchase in the ROTH I just set up.

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Just remember, if NICK turns out to be a dog, don't blame me. But if it turns out to be great, send me money The risks have been laid out pretty clearly here, by Scorpion Man and others. I'm a big NICK fan, still holding and I have about 20-25% of my net worth in it. But I could be wrong and I reserve the right to change my mind and dump my shares at any time without warning you or anyone.* Always think for yourself.

good luck...

* This is my version of typical "cover my ass" boilerplate.

[James282]

DC, after due dilligence I got in on NICK as well. Sleepy growth potential, but seems like there is just enough kick behind its record of increasing earnings that it won't become a value trap. I don't have a huge position at this point, about 2.5% of my total portfolio, which represents about 1/2 my normal position. I'll get more in if the company becomes even cheaper or if I learn more that seems to dampen the risk factor.

James