A Favorite Stock, NICK

[DesertCat]

One
my all time favorite small caps is NICK, Nicholas Financial and it's on sale.

I wrote up a posting at my blog (http://stock-notes.blogspot.com/)
that goes into more detail about it. I'd love to hear some critical
viewpoints as it's a very important position for me. Here is the first
paragraph which I think pretty much summarizes my opinion.

"How much would you pay for a company that's grown same quarter
revenues and earnings for 65 out of it's last 66 quarters? That's
grown EPS from 12 cents per share to $1.08 per share over the last ten
years (23.6% annualized). A quality company with solid financials
built solely through organic growth, (no rollup), with at least
another decade of strong growth ahead in the U.S. market along. I
understand, you're a bargain type guy, and you don't like to overpay
for anything, even your wife's engagement present. So how about if Mr.
Market puts this hot little number on sale, just for a short time, at
a little less than 11 times reported TTM earnings? Not interesting
enough? What if earnings may be substantially understated?"

http://stock-notes.blogspot.com/

[James282]

5 stars in motley fool CAPS. Looks good from here! And great write-up, btw.

James

[En Passant]

Good info desert, thanks!

[Scorpion Man]

I am not surprised the stock has sold off. I am somewhat surprised it has not sold off more. The credit trends are quite scary in the Q from what I read.

This, in particular, looks bad - I know its hard to read here, but its page 20 of the 10Q, and the key is to look at the percentages, which are increasing right to left (last yr to this year). THese are large increases. In a finance company, this is quite a big deal.

The provision for credit losses increased from approximately $832,000 for the three months ended September 30, 2005 to $852,000 for the three months ended September 30, 2006. The provision for credit losses increased from approximately $1,260,000 for the six months ended September 30, 2005 to $1,662,000 for the six months ended September 30, 2006. The Company’s losses as a percentage of liquidation increased from 6.48% for the three months ended September 30, 2005 to 7.65% for the three months ended September 30, 2006. The Company’s losses as a percentage of liquidation increased from 5.77% for the six months ended September 30, 2005 to 6.37% for the six months ended September 30, 2006. The Company anticipates losses as a percentage of liquidation will be in the 6-9% range during the remainder of the current fiscal year. The longer term outlook for portfolio performance will depend on the overall economic conditions, the unemployment rate and the Company’s ability to monitor, manage and implement its underwriting philosophy in additional geographic areas as it strives to continue its expansion. The Company does not believe there have been any significant changes in loan concentrations, terms or quality of Contracts purchased during the three or six months ended September 30, 2006 that would have contributed to the increase in losses.

Recoveries as a percentage of charge-offs were 13% and 16% for the three months ended September 30, 2006 and 2005, respectively. Recoveries as a percentage of charge-offs were 15% and 18% for the six months ended September 30, 2006 and 2005, respectively. The Company believes that as it continues to expand its operations, it will become more difficult to implement its loss recovery model in geographic areas further away from its Corporate headquarters, and as a result, the Company will likely experience declining recovery rates over the long term.

The Company believes there is a correlation between the unemployment rate and future portfolio performance. The Company does not expect the U.S. unemployment rate to rise or fall significantly in the foreseeable future. Therefore the Company does not plan on increasing or decreasing reserves based on the current U.S. unemployment rate. The number of bankruptcy filings by customers during the three and six months ended September 30, 2006 remained consistent with recent reporting periods.

The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and under its direct consumer loan program:



At September 30, 2006 At September 30, 2005

Contracts


Gross balance outstanding
$ 227,429,864 $ 194,489,189



Delinquencies


30 to 59 days
$ 4,167,057 1.83 % $ 2,793,371 1.44 %

60 to 89 days
1,465,884 0.64 % 707,902 0.36 %

90 + days
563,469 0.25 % 375,156 0.19 %


Total delinquencies
$ 6,196,410 2.72 % $ 3,876,429 1.99 %


Direct Loans


Gross balance outstanding
$ 9,724,049 $ 7,077,542



Delinquencies


30 to 59 days
$ 162,706 1.67 % $ 42,556 0.60 %

60 to 89 days
26,303 0.27 % 21,067 0.30 %

90 + days
25,178 0.26 % 28,138 0.40 %


Total delinquencies
$ 214,187 2.20 % $ 91,761 1.30 %


The delinquency percentage for Contracts more than thirty days past at September 30, 2006 was 2.72% as compared to 1.99% at September 30, 2005. The delinquency percentage for direct loans more than thirty days past due at September 30, 2006 was 2.20% as compared to 1.30% at September 30, 2005.

The Company does not give significant consideration to short-term trends in delinquency percentages when evaluating reserve levels. However, the Company believes delinquency trends over several reporting periods are more useful in estimating future losses and overall portfolio performance. The Company also estimates future portfolio performance by considering various factors, the most significant of which are described as follows. The Company analyzes historical static pool performance for each branch location when determining appropriate reserve levels. The Company utilizes internal branch audits as an indication of future static pool performance. The Company also considers such things as the current unemployment rate in markets the Company operates in, the percentage of voluntary repossessions as compared to prior periods, the percentage of bankruptcy filings as compared to prior periods and other leading economic indicators.

[Scorpion Man]

In addition, this is bad at least at first glance...it means the comps are worse than they look- it was 5% of operating earnings in the Q...

The provision increased from approximately $832,000 for the three-month period ended September 30, 2005 to $852,000 for the corresponding period ended September 30, 2006 for credit losses. The increase in the provision is net of provisions reversed for the three-month period ended September 30, 2006, which totaled approximately $201,000. No provisions were reversed during the three months ended September 30, 2005. The reversal of provisions previously recorded was due to the charge-off performance of static pools originated from April 2005 thru September 2005.

The net portfolio yield increased from 22.17% for the six-month period ended September 30, 2005 to 22.22% for the corresponding period ended September 30, 2006. The net portfolio yield increased due to the above factors, net of additional provisions for credit losses required for the change in the recognition of interest (see discussion under “Analysis of Credit Losses” below) and the resulting affect on the provision for credit losses. The provision increased from approximately $1,260,000 for the six-month period ended September 30, 2005 to $1,662,000 for the corresponding period ended September 30, 2006 for credit losses. The increase in the provision is net of provisions reversed for the six-month period ended September 30, 2006, which totaled approximately $617,000. No provisions were reversed during the six months ended September 30, 2005. The reversal of provisions previously recorded was due to the charge-off performance of static pools originated from April 2005 thru September 2005.


This is not good either:
The average dealer discount associated with new volume for the three months ended September 30, 2006 and 2005 were 8.32% and 8.71%, respectively. The average dealer discount associated with new volume for the six months ended September 30, 2006 and 2005 were 8.43% and 8.63%, respectively. The Company believes the average dealer discount may continue to decrease as the result of competition in the markets the Company is currently operating in.

[Dazarath]

A little OT: DC, are you going to be posting regularly in your blog? I'd be very interested in reading.

[schnoodleC]

Thanks for the write up Cat. BTW, I am also heavily into Kaiser and have gained respect for you by seeing you have a position in it. However, FYI, Tennenbaum and family want to keep the company together (against the wishes of most investors) and try to repeat something along the lines of what they did in CO. I think the dividend is just something done to appese investors since they have been sitting on the money for a long time. Here's to hoping they either give up and liquidate or launch into a successful ventor soon. The good news is that I think that if they are successful in securing another deal like in CO, I think there is immediate value in their ability to gain such deals for the company that is probably around 4-5$ per share.

[DesertCat]

[ QUOTE ]
In addition, this is bad at least at first glance...it means the comps are worse than they look- it was 5% of operating earnings in the Q...


[/ QUOTE ]

These are all reasons why NICK is on sale. It's also a concern that they've had increased chargeoffs/writeoffs in a period where unemployment hasn't risen.

Why am I not concerned? Because they've been through it before. These delinquency rates flunctuate, and last year they were the lowest in the history of NICK. So the comps were unrealistic, and it's not surprising they'd increase this year. But if you think this is a trend that will continue, it's silly to buy now as you'll likely get a better price following more bad news.

I'm fully invested here, so I don't think much about timing the best purchase price based on a bad quarter or two. My bigger concern is, has something bad happened to their business model that damages the intrinsic value of the investment?

So far, I don't think so. They've been through much worse competitive environments and still grown their business through it. I'm trusting management to be very conservative, to not get overly leveraged and not chase bad business (even if it costs growth), which is what they've done in their history. Note how often this management team has over-reserved for potential losses, and how often those reserves end up being reversed into earnings.

[James282]

Thanks for all the info DC, I am considering opening a position in this company and if at some point you believe there to be more significant news(in either direction) please let us know!

James

[DesertCat]

[ QUOTE ]
A little OT: DC, are you going to be posting regularly in your blog? I'd be very interested in reading.

[/ QUOTE ]

I hope so. I just posted a more detailed analysis of Scorpion Man's concerns. To summarize, here is a look at some key metrics from the last 8 years that show this year isn't totally out of whack historically.

[ QUOTE ]

Total Delinquencies %
2006 (Q3) 2.72%
2005 (Q3) 1.99%
2004 (Y) 1.54%
2003 (y) 2.20%
2002 (Y) 2.32%
2001 (Y) 1.90%
2000 (Y) 2.49%
1999 (Y) 3.03%

Charge Off Percentages
2006 7.26%
2005 5.83%
2004 7.26%
2003 8.13%
2002 7.63%
2001 6.16%
2000 5.88%
1999 6.84%


[/ QUOTE ]