Description

NICK has been written up many times before, so I will refer everyone to the other write-ups for a detailed description of the business, but in a nut shell NICK is a sub-prime auto lender. With the recent collapse of the major financial names, the word sub-prime and fact we’re dealing with a micro-cap NICK has been punished along with others. But NICK is more conservatively managed then some of the biggest banks in the country, and when plotted over any reasonable time frame the results always seem to show up in the stock price. I believe at current levels NICK offers 2-3X return over the next 2-3 years without changing much to the story. For those that need to worry about the price volatility you get to collect a newly instituted  cash dividend which I thinks puts a floor on the stock, as well as the knowledge that there are interested buyers who have made overtures for the company at probably 50% higher than current prices.

Brief Description of the business:

NICK runs a network of 60 or so loan origination offices in a handful of states. It starts by sending a loan officer to work from home, develop an area, start the office and then staff it. NICK tends to work with used car dealers as a financing option to their most difficult to finance clients.  For a more comprehensive description just peruse some of the great write-ups done on NICK. While NICK has appreciated 5X over the last 8 years it is now trading at a valuation similar to when it was first written up and I think is a safer company because of its increased size.

The key things to note

1. The DO NOT securitize
2. They focus on individuals that are effectively special situations. Their clients have broken FICO scores, but usually because of some external factor having nothing to do with bad credit behavior. Usually a one time event like a medical emergency or sudden loss of work. But the FICO scores keep them out of the purview of traditional financing.
3. Their loans are secured by late model cars, which have a deep and relatively liquid resale value. So I think their credit risk is overstated.

Earlier this year NICK was approached with a buyout offer. Suitor unknown but the stock rallied to above $12 a share. The company hired bankers and for all intents and purposes the offer seemed real and bona fide. We have to assume that the takeout offer was north of $12 bucks I am guessing at least $13-$15 bucks given comps in the space.  Ultimately, to the disappointment of many on VIC, NICK declined the offer as not in the best interest of shareholders.

Things that have changed since the last post

• Buyout offer was declined
• NICK instituted a 10 cent a quarter dividend, which equates to a 4% yield at today’s close of $10
• NICK has grown the business, but has DECREASED, its credit line
• DECREASED leverage
• Increased Book Value
• Price has dropped 25%

NICK was most attractive to me because it has a high ROE, grew the business, but figured out how to deleverage in the process and not really sacrifice ROE. Over the last 8 years since NICK was first posted, the business is now more diversified, the Funding syndicate is more stable, and their dependence on the syndicate or external funding in general continues to decline, all while being able to buy in at a similar valuation.

Valuation

NICK is trading at or slightly below book, and while I know there are many financial names trading at even “cheaper” valuations I think you won’t find many if any trading at that valuations with modest (and decreasing) leverage and stable funding sources, with predictable lines of business.

David 101 really caught the bottom with his write-up in May 2009, and while it might not be that cheap now I think buying into this franchise is really attractive at current prices. As a micro-cap NICK gets tossed around a lot with the current market backdrop, but for dedicated Value investors that’s a great thing.

Downside is protected

• 4% dividend yield
• Trading below tangible book, and run-off scenarios
• Decreasing Leverage
• They already proved they could survive the worst case in 2008/09
• Insider ownership at 20%

The Upside

• NICK generates 15-20% ROE pretty consistency
• Growing loan book
• Decreasing charge-offs
• Improving economy
• Less competition in the market
• Low interest rates for at least 2 years
• Office Expansion and more operating leverage on existing offices

Earnings:

However you want to look at it NICK is worth a lot more in 2-3 years with very low risk of loss, and unabated growth opportunities. 60 offices in the US is not a lot in the used car market. NICK could easily grow for the next 10 years they way it has for the last 10.

In the first 6 months of their year they reported 90 cents of Net Income, Assume for full year they could do at least $1.60 this year and at least $2.00 next year at a 10X multiple that’s a clean double.

Even if you look at in on a book value basis, and assume they can grow book value by 18% a year and it continues to trade near book value that seems like 40-50% upside from current prices. In 2-3 years I would hope we see a meaningful rebound in the economy and markets and would expect this to trade at a premium to book, but if book is what the market will give me then so be it.

To me investing in NICK is a question regarding opportunity set. I agree that names like Citigroup offer a bigger discount to book, and added liquidity etc, but I think they come with much more risk. Those business employ more leverage, are harder to understand, etc. NICK is a safe double for the patient investor and maybe more without any real risk to loss of capital if you have the right time horizon.

Note: I wrote this up last night as of the last closing price, but VIC was having problems with its systems. It is up slightly this morning, but I don’t think that changes the thesis dramatically. A whiff of bad news from Europe and this will go back down to $10 bucks.

Risk:

I think funding risk from the syndicate is greatly diminished and I think the largest risk to the company is CEO succession and a hairy market that might cut the stock price a bit in short order but nothing that would be a permanent impairment to capital. Government regulation might be another risk, but as stated before I don’t see it happening for a while, and definitely in other markets like credit cards, and pay day loans first.

Catalyst

I wouldn’t be surprised to see the company issue a onetime dividend which would be great and I am sure draw attention to the stock

New takeout offer