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Would you care to tell us your PIV-ER for FMD?

Show me yours' first.


If you are not able to build your own PIV-ER, then you do not understand it. So now is the time to learn. Then you'll have the PIV-ER tool long after this board goes to TMF digital heaven.

Do you have any concerns about the estimated residual cash flows that have yet to materialize?

Yes. I worry about everything.

Which is why I also value First Marblehead on the basis of its defensive profits (free cash flow). The defensive income statement expenses investment in working capital, including receivables, dollar-for-dollar in the period incurred. FMD's defensive profits for the 12 months ending 9/30/07 is $110 million.

This $110 million figure a) includes a $375 million charge for the year-over-year incremental increase in receivable, and b) uses $159 million of cash taxes rather than the $274 million of GAAP taxes. (See page 62 of my book to learn more about cash taxes.)

If you think expensing receivables is too pessimistic, then use structural free cash flow. This version excludes investment in working capital. FMD's TTM structural free cash flow for the 12 months ending 9/30/07 is $374 million.

Since FMD's per-share revenue is up at a 5-year CAGR of 78%, we can assume most of its investment in receivables is growth related. If we fully expense this $375 million investment, then we are saying the receivables have no future value...that FMD will never collect its IOU's.

I do not believe the receivables are worthless. If for no other reason, insiders have 900 million reasons to make sure the assumptions used to value the receivables are reasonable. Four directors, Lelsie Alexander, Stephen Anbinder, William Berkley, and Dort Cameron, own 28 million of FMD's 93 million shares outstanding. Since the latest proxy, the only director to sell any shares is Anbinder, who sold 150,000 of his 3.5 million share position. A mote in the scheme of things.

The concerns that we all have about FMD -- e.g., its earnings quality, the turmoil in the ABS market, Ambac's woes, whether the TERI database is all that it's cracked up to be, etc. -- is offset by the growing market share/growing market double play, as well as the massive insider ownership.

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