Earnings Preview for Nicholas Financial

Nicholas Financial ($NICK) will report its fourth-quarter earnings on May 5th. I’ve probably written more about NICK than any other stock. It’s done incredibly well for us and I’m very happy to say that I continue to see more success for NICK.

By just about any reasonable valuation, NICK is absurdly cheap. The stock closed Tuesday at $12.16 per share. Let’s look at some numbers. For the first three quarters of NICK’s fiscal year, the company earned $1.01 per share. I’m projecting that they’ll earn 40 cents per share for Q4.

If someone told me two years ago that NICK could earn 40 cents per share in one quarter, I would have thought they were nuts. And I never would have thought I’d be the one making that projection, but that’s a very reasonable target for NICK’s Q4 earnings.

That would bring NICK’s full-year earnings up to $1.41 per share which means the stock is going for 8.62 times trailing earnings. That’s an earnings yield of 11.6%. Let’s just say there aren’t many bonds giving you that.

Additionally, the quality of NICK’s portfolio is increasing. Some of the improvement in NICK’s bottom line is due to lower reserves. I really can’t hold that against the company since it means they were overly conservative during a very rough patch.

Short-term interest rates continue to be very low which also helps NICK. The company borrows for 5% and lends out for 25% which is an equation I like a lot. Mind you, there could be troubles in NICK’s future like higher oil prices or a downturn in the economy. Yet the company has shown how well it can manage itself during difficult times.

For the coming fiscal year, I think it’s very reasonable to assume NICK can earn $1.55 to $1.60 per share. If things go well, they can earn as much as $1.70. Even a modest earnings multiple on a conservative estimate means this is a $17 stock.

Since NICK is so small, it’s not followed by a single analyst on Wall Street. That’s their loss. While I feel very confident about 40 cents per share, I have no idea what the stock will do. I can’t say for certain that the market will finally realize the value in NICK, but I doubt this undervalued gem can stay a secret for long.

One final note: The stock jumped earlier this year on news of that NICK might be acquired. In my view, the biggest risk was that NICK would go for too low a price. Since we haven’t heard any news since, I think it’s safe to assume that the company felt the same way. If that’s the case, I’m glad they said “no.”

When NICK hits $17, I bet there will be even more offers.

Posted by on April 20th, 2011 at 9:48 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.