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’s other strengths include its improvement in charge-offs, delinquencies and SG&A:
- Improvement in Charge-offs. The company went through a period of relatively high charge-offs, specifically from 2003 to 2006 when charge-offs ran 30 – 50% of gross investments. In 2009, these figures were just 11%. However, the company has been reducing its provisions for losses faster than its charge-offs have been improving (especially in the last year, when charge-offs have actually ticked up a bit). I would rather see management be more conservative with their provisioning.
- Improvement in Delinquencies. The most recent quarter witnessed a decrease in delinquencies, as those leases past due declined 410bp (the bulk of this being the worst delinquencies, those over 90 days overdue, which declined 310bp).
- Improvement in SG&A: We have seen an improvement in the company’s SG&A over the last several years, to the lowest rate in the last decade (26% in the most recent quarter, 29% in 2009 overall).
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
Author Disclosure: No Position.