Tuesday, October 18, 2011

Nicholas Financial: Quality on Sale

I recently added to my previously held position, Nicholas Financial (NASDAQ:NICK), at $9.74. Nicholas is in the business of making sub-prime auto loans.

Contrary to the business description, it is one of the highest quality financial that I have come across - it has continued to stay profitable over the past decade consistently doing Returns on Average Equity (ROAE) of 10% to 15% (with the exception of 2008 when ROAE dropped to 6%), despite this period being one of the worst for financials since the depression. It is one of the few financials that continues to grow in this dismal environment of poor loan demand and does not face as big a risk of net interest margin compression as the conventional banks.

At current valuations, the upside is of 70% to 150% over the next 5 years, or an IRR of 11% to 20%. Add to this a dividend yield of 4%, you get a very compelling IRR of 15% to 24%, and a very limited chance of permanent loss of capital, thanks to its conservatively reported book value of $10 per share.

For a full write up, I recommend you read my submission for Gurufocus' October Value Contest here

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