First Marblehead: Solid

Is THe Long SLide Over?
First Marblehead (FMD ), which processes student loans for banks and private lenders, hit 73 in March but has since tumbled -- to 21 on Oct. 7 -- in good part because of missed sales targets and worries that the new bankruptcy law will deter students from borrowing. Now the stock is back up to 32. Carl Birkelbach of Birkelbach Management was quick to buy in. "The stock has huge upside potential as earnings continue to ratchet up," he says. Since 2001, when First Marblehead went public, earnings have shot from 4 cents a share to $2.39 in fiscal 2005, ended June 30. For 2006, Standard & Poor's (MHP ) sees $3.10. First Marblehead collects fees from banks and other lenders for servicing their student loans. Birkelbach predicts the stock will hit 43 in a year. On Sept. 28, Chairman and CEO Daniel Meyers had to quit after it was learned that he had exchanged gifts with an employee (since resigned) of Bank of America, a major client. The stock reacted -- investors feared BofA (BAC ) might cancel its contract. But Birkelbach doubts BofA would pull out. And so far, no such thing has happened, notes Joseph Halpern of Halpern Capital, who owns shares and rates the stock "outperform." The stock trades at nine times 2005 profits He sees it climbing to 46, or 15 times projected 2006 earnings. "Given the robust earnings in 2006, a 15 p-e ratio is "conservative, at the least," says Halpern. Zacks's 2007 consensus estimate is $3.51 a share.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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