Description

Company Name: FRANKLIN CREDIT MGMT CORP Price: 5.50
Ticker Symbol FCSC Shares Out (in mils): 5.917
Idea Date: mm/dd/yy Last 12 mths EPS: 1.80 Proforma est.
Long Term Debt (in mils.): 691.3 Last 12 mths Revs (in mils): 38.7 Actual reported
52 Wk High: 5.75 52 Wk Low: 2.85


Description:

For some 45 years when folks ask us these three questions, it has usually meant we have found an unusual stock, which becomes a big winner:

1. How are you going to buy enough of it?
2. What is going to make it go up?
3. How are you going to get out of it?

I'll bet you dear reader are likely to ask these questions re the stock we are about to discuss with you in summary form.

Such a potential "winner" is Franklin Credit Management Corporation which collects and services performing, subperforming, nonperforming, and nonconforming notes receivable and promissory notes. The Company acquires such notes receivable from financial institutions, and mortgage and finance companies.

On June 30, 2004 FCSC purchased from Bank One a portfolio of largely performing residential first mortgages With a face amount of $310,431,219 and paid $275,141,492 in cash for them borrowing from its existing lender, Sky Financial Bank, $277,964,322 pursuant to five term loans. This transaction leveraged the balance sheet mightily from $475 million of total footings to $753 million on an equity base of $21.7 million. This will of course appear a scary situation to the casual analyst.

Furthermore the borrowings adjust monthly and the mortgages are fixed. This of course should be enough to scare even the more than casual analyst. We would point out several facts, however which serve to mitigate the above “scare”. Turnover of the type of paper purchased historically is 30%-40% and the company must and does thus replace such paper yearly. Second, the vigorish furnished (interest and fees from late payments less borrowing costs) provides a very wide 5+% basis point margin of safety which is unlikely to eliminate profit in a year or two (certainly could lower reported earnings), the loan loss reserve is a substantial 10%, there are hidden R E assets on the balance sheet which raise the real equity above the apparent equity, and too Sky Bank is the holder of some $695 million of FCSC notes. (One can of course wonder if they know what they are doing.) We suggest they do as they have been lending FCSC for some years now and are also willing to lend substantial additional funds as well. Moreover, we believe Franklin possesses yet more and substantial borrowing power witout need for eqity -- though in time and in due course they wil surely raise additional equity. But not until they are ready to come out of their shell. And by the way we have reason to believe they may have recently repurchased some shares from a former executive.

There is also albeit at the moment, a bit thin(A trek down to SOHO in NYC is advised and should prove extremely interesting we believe.) The quality of management you can assess for yourself but we are inclined to say it is of high caliber. The founder owns some 54% of the outstanding, has bought stock when he could and certainly appears highly unlikely to ever be a seller until there is a material double-digit share price and perhaps P/E as well.

Which brings us to the P/E. In one of the material understatements of the day, in an 8K filing, management stated: “We expect the acquisition to be accretive to net income
and earnings per share, as it will allow us to expand our operating platform
and leverage SG&A expenses across a larger revenue base".

The pro forma EPS for the full year ended 12/31/03 was stated as $1.62 fully diluted vs. $1.02 per diluted share, which was reported

12 month pro forma EPS to 6/30/04 for the aforementioned Bank One purchase appears to be about $1.80 so that the apparent P/E of 5.1 is on a pro forma basis just 3.

I don’t know of any stocks with a growth record that have such a low single digit P/E on past performance and which have a straight up 5-year EPS growth record. Beginning with 1999, through 2003, FCSC reported diluted EPS of $0.02, $0.10, $0. 49, $0.92 and $1.02 which adjusts as noted above to $1.62.cn


The thesis is this: a company which is basically unknown, overlooked and ignored by most save a few who between 3/11/04 and 9/1/04 traded, between $3.35 and $5.50, an average of 5,000 shares per day, will have a path beaten to its door, and value will out, as folks come across this investment, just as I feel I am letting the cat out of the bag to you all today

It is not for the risk adverse or faint of heart, indeed growing pains will occur, but when compared to all sorts of peer firms that are also in the same business category, but which possess high single digit P/Es, and lots with double digit P/Es, one can pay his money and take his chances and bet on P/E expansion (as well as EPS growth) or one can study the K and Q and meet and question Tom Axon “the boss’ and Alan Joseph the CFO and any of an interesting and clever and rather financially sophisticated BOD who are available to anyone who contacts them for further insight.

The FCSC value discrepancy is in our book to large to ignore.

Catalyst

Catalyst:
Value will out as folks learn about FCSC and a constituency develops. Time, patience, increasing profits and P/E expansion should do the trick.