MicroFinancial Incorporated (NASDAQ:MFI) leases commercial equipment valued between $500 and $25,000 to a range of lessees. MFI does not purchase equipment until a potential lessee actually enters into a lease, at which point MFI buys the equipment from its dealer network, and MFI doesn't see the equipment again until the end of the lease. It is currently trading at a discount to NCAV of approximately 17%, has a P/E of approximately 11, has remained profitable throughout the recession and has the most conservative balance sheet in its industry (D/E of 0.87, whereas competitors like NICK and MRLN are at 1.12 and 1.24 respectively). The company's other strengths include its improvement in charge-offs, delinquencies and SG&A:
Substantially all of MFI's leases are noncancelable and they last on average 44months. The average yield on these leases in 2009 was 27.7%, down from a high of 38.1% in 2001, but only slightly below 2008 (28.5%) and 2007 (29%). At these high rates and given the small price of the equipment, it is clear that the customer has low credit quality and few other options. This contributes to a fairly high level of charge-offs, with a five year average of about $18m/year, though the company has a decent recovery rate of about $5m/year making the net effect around $13m (slightly less, since I've been rounding). The company provides for charge-offs at a rate of about $12.5m/year (5yr avg) which is pretty close to the net charge-offs.
The company pays a dividend which currently yields 5% and their board recently (last Q) approved a new share repurchase program of up to 250,000 shares, both of which are shareholder friendly actions.
MFI's weaknesses include the fact that its average yield has declined rather dramatically (as mentioned above), that actual charge-offs have increased this year, and that the company has a substantial amount of dilutive options outstanding. Additionally, the company's varied operational performance historically has made it impossible to project forward with any accuracy. The result is that it can only be valued on its assets, and unfortunately its discount is insufficient to provide much of a margin of safety (I would need at least 1/3 discount for a company with an operating history like this). What are your thoughts?
Talk to Frank about MFI
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The company's other strengths include its improvement in charge-offs, delinquencies and SG&A: