NICK - Nicholas Financial

[Txvestor]

Rishig,

Excellent work compiling that spreadsheet.

The most obvious things looking at the spreadsheet for me are as follows:

 

1) an increase in leverage to nearly 2:1 compared to the 1:1 in the previous cycle at arguably the start of it. A function of share buybacks and exit of the founder. Nonetheless a heightening of risk.

2) gross portfolio yield has trended lower over time, even adjusting for cyclicality. It was well north of 30% last time loan losses started to rise, now 26 and ? Dropping.  I think thats a translational effect and a function of the easy money fed.

3) provisions for losses crested at 14.7% last time, we are at 8.9%, however conservative their underwriting may be, everyone is influenced by competition to some extent and i suspect this cycle might go higher than everyone expects, that said we are unlikely to see the extreme systemic stress of 2008/9 again, so i think loan loss provisions will likley stay under 14.7. 12.5% maybe? Thats still quite a way up from here.

4) interest expense has trended higher, maybe a function of the higher leverage. Thats a meaningful impact on margins.

5) expenses/cost structure has remained faily rigid and constant, likely reflecting their business and compensation model.

 

When you put these together, i see heightened credit risk and lower net margins until the clear out, which I still believe is a couple of quarters if not a year away looking at the trends. I think Mr Market is discounting this scenario. I can envisage a scenario where NICK profitability goes to 0 or slightly negative, and that would present the ideal opportunity. Sorry if I'm being pessimistic, but i think this could trade lower in coming months.

 

[DTEJD1997]

 

This has happened before - when the tide turns, the credit unions retreat - and then Nicholas makes a bunch of money in the upturn.

 

This is the long-term bull thesis.  But is it correct, or has the market changed because a much greater percentage of the market is being taken by well-funded players (e.g., WFC and Santander) that are in the market to stay?  Or does this not matter because NICK uses different underwriting criteria and methods that cannot be used at the scale needed by gigantic firms like WFC?

 

These larger & well funded players periodically enter & exit the market.  The previous CEO had addressed this a few times in the annual reports.  Typically what happens is they desire to make more easy money on sub-prime car loans.  They get some initial success, but then they get sloppy, or were sloppy from the beginning and get burned in a down turn.  After losing money, they then proceed to exit the market.

 

This type of thing has followed a cycle in the past.  I suspect it probably will in the future too.

[rishig]

Rishig,

Excellent work compiling that spreadsheet.

The most obvious things looking at the spreadsheet for me are as follows:

 

1) an increase in leverage to nearly 2:1 compared to the 1:1 in the previous cycle at arguably the start of it. A function of share buybacks and exit of the founder. Nonetheless a heightening of risk.

2) gross portfolio yield has trended lower over time, even adjusting for cyclicality. It was well north of 30% last time loan losses started to rise, niw 26 and ? Dropping.  I think thats a translational effect and a function of the easy money fed.

3) provisions for losses crested at 14.7% last time, we are at 8.9%, however conservative their underwriting may be, everyone is influenced by competition to some extent and i suspect this cycle might go higher than everyone expects, that said we are unlikely to see the extreme systemic stress of 2008/9 again, so i think loan loss provisions will likley stay under 14.7. 12.5% maybe? Thats still quite a way up from here.

4) interest expense has trended higher, maybe a function of the higher leverage. Thats a meaningful impact on margins.

5) expenses/cost structure has remained faily rigid and constant, likely reflecting their business and compensation model.

 

When you put these together, i see heightened credit risk and lower net margins until the clear out, which I still believe is a couple of quarters if not a year away looking at the trends. I think Mr Market is discounting this scenario. I can envisage a scenario where NICK profitability goes to 0 or slightly negative, and that would present the ideal opportunity. Sorry if I'm being pessimistic, but i think this could trade lower in coming months.

 

No reason to be sorry. Your points are very fair.

 

The best time to buy a "good" cyclical (whatever that means) is when the P/E is infinite and the P/B discount is the widest. Surely, today it does not meet that criteria.

 

I made the same "mistake" of being too early in NICK in 2007. I bought it when it was profitable and trading at P/B of 0.8 (like today). It traded down to P/B of 0.25x, but never losing ground on the book value. Their reserves have consistently been very conservative and book value has held very well through the years. I averaged down several times and it was painful, but then it outperformed dramatically (multi-bagger) as competition disappeared.

 

History may not repeat itself, my past experience may be breeding undeserved confidence, and I may be in for a rude awakening. But, given their conservative balance sheet, I am not sure how book value could recede this time around.

 

Given its debt, their leverage is far lower than any financial I have ever seen, including subprime lenders of any kind.

[DTEJD1997]

Hey all:

 

NICK reported earnings the other day.  I was very surprised to learn that they had lost money!

 

The other surprising thing is that NICK is reporting all sorts of "shenanigans" in the loan underwriting process.  There are reports that dealers are pushing bad paper, specifically that they are not accurately representing the borrower's situation.  For example, higher income, higher assets, employment status, etc.

 

SO

 

If NICK is having problems with this...other underwriters should be having this problem X2?  NICK has been known as having VERY STRICT criteria for purchasing loans.

 

This situation is very similar to the housing melt down of 2008.

 

This is a bad omen...

[rishig]

Rishig,

Excellent work compiling that spreadsheet.

The most obvious things looking at the spreadsheet for me are as follows:

 

1) an increase in leverage to nearly 2:1 compared to the 1:1 in the previous cycle at arguably the start of it. A function of share buybacks and exit of the founder. Nonetheless a heightening of risk.

2) gross portfolio yield has trended lower over time, even adjusting for cyclicality. It was well north of 30% last time loan losses started to rise, niw 26 and ? Dropping.  I think thats a translational effect and a function of the easy money fed.

3) provisions for losses crested at 14.7% last time, we are at 8.9%, however conservative their underwriting may be, everyone is influenced by competition to some extent and i suspect this cycle might go higher than everyone expects, that said we are unlikely to see the extreme systemic stress of 2008/9 again, so i think loan loss provisions will likley stay under 14.7. 12.5% maybe? Thats still quite a way up from here.

4) interest expense has trended higher, maybe a function of the higher leverage. Thats a meaningful impact on margins.

5) expenses/cost structure has remained faily rigid and constant, likely reflecting their business and compensation model.

 

When you put these together, i see heightened credit risk and lower net margins until the clear out, which I still believe is a couple of quarters if not a year away looking at the trends. I think Mr Market is discounting this scenario. I can envisage a scenario where NICK profitability goes to 0 or slightly negative, and that would present the ideal opportunity. Sorry if I'm being pessimistic, but i think this could trade lower in coming months.

 

No reason to be sorry. Your points are very fair.

 

The best time to buy a "good" cyclical (whatever that means) is when the P/E is infinite and the P/B discount is the widest. Surely, today it does not meet that criteria.

 

I made the same "mistake" of being too early in NICK in 2007. I bought it when it was profitable and trading at P/B of 0.8 (like today). It traded down to P/B of 0.25x, but never losing ground on the book value. Their reserves have consistently been very conservative and book value has held very well through the years. I averaged down several times and it was painful, but then it outperformed dramatically (multi-bagger) as competition disappeared.

 

History may not repeat itself, my past experience may be breeding undeserved confidence, and I may be in for a rude awakening. But, given their conservative balance sheet, I am not sure how book value could recede this time around.

 

Given its debt, their leverage is far lower than any financial I have ever seen, including subprime lenders of any kind.

 

My rude awakening is here. Their results were far worse than I expected.

[bskptkl]

Hey all:

 

NICK reported earnings the other day.  I was very surprised to learn that they had lost money!

 

The other surprising thing is that NICK is reporting all sorts of "shenanigans" in the loan underwriting process.  There are reports that dealers are pushing bad paper, specifically that they are not accurately representing the borrower's situation.  For example, higher income, higher assets, employment status, etc.

 

SO

 

If NICK is having problems with this...other underwriters should be having this problem X2?  NICK has been known as having VERY STRICT criteria for purchasing loans.

 

This situation is very similar to the housing melt down of 2008.

 

This is a bad omen...

But I think stock is a buy here at $8 and change...Losses due to increases in loan loss provisions so the hope is that they are being conservative in their estimates as they have been in the past.

[Txvestor]

Hey all:

 

NICK reported earnings the other day.  I was very surprised to learn that they had lost money!

 

The other surprising thing is that NICK is reporting all sorts of "shenanigans" in the loan underwriting process.  There are reports that dealers are pushing bad paper, specifically that they are not accurately representing the borrower's situation.  For example, higher income, higher assets, employment status, etc.

 

SO

 

If NICK is having problems with this...other underwriters should be having this problem X2?  NICK has been known as having VERY STRICT criteria for purchasing loans.

 

This situation is very similar to the housing melt down of 2008.

 

This is a bad omen...

But I think stock is a buy here at $8 and change...Losses due to increases in loan loss provisions so the hope is that they are being conservative in their estimates as they have been in the past.

 

You may be right, but those were some ugly numbers and the loan losses trend was higher YOY, QonQ or pretty much any comp. that despite declining revenue numbers. Even liquidation values for repo.  vehicles was down. Whats worse, and what keeps me away from the stock for now, is that they just announced a change in the underwriting policies after expanding their balance sheet in recent years. That tells me the loan losses are nowhere near done and it will be a long next couple of years. It is cheap but i think it is cheap for a reason, and the red ink is going to keep flowing i'm afraid.

[HJ]

This is a small stock, but looks like there are new guys driving the bus now.  Westlake the most natural buyer?

 

http://www.bizjournals.com/tampabay/news/2017/06/12/why-there-will-be-a-change-in-leadership-at-a-91m.html