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Potentially Powerful Value in Credit Service Companies

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There's nothing quite like value, especially when it comes in lender form. I like significant profit margins and I want something that pays. Naturally, I want to get all the value I can for the price. If you've got a similar mindset, I'd encourage you to follow along while I take a look at a few potential goodies. Just be careful -- knowing a company's name and being familiar with their products can lull anyone into a false sense of security.

Nelnet (NYSE: NNI) is all about student loans. I like the industry partially because of my success a few years ago with First Marblehead and mostly because student loans are harder to escape from than a mob hitman. The hitman will generally give up if he thinks you're already dead, while student loan companies are known to keep plugging away.  I like how Nelnet is in two of the world's most robust economies, the US and Canada. While we're next door neighbors, we're very different as economies and that provides a lot of strength. I'm also a fan of Nelnet's 28.1% profit margins. So far so good.

But there's always something, isn't there? While student loans are generally nice ways to help people pay for college, they can be misused. And there's a pretty good chance that for nearly 20 years, Nelnet has been abusing a loophole that let them rake in more a billion dollars in extra profits. As well, the company has made significant contributions to the campaign funds of many in the Congress, which smacks of shady dealing. One of the big secrets that everybody knows is that we in the States call our bribes "contributions" and talk about them a lot. If you're okay with a little shadiness, I'd say Nelnet's valuation of 7.54 times earnings and 1.2 times book value makes it a pretty decent buy right now. 

Discover Financial Services (NYSE: DFS) is a credit card company that has almost 50 million cardholders including myself. That's pretty intense, and Discover is third place in size as credit card companies go. What really surprised me during my research was that Sears (pre-cursor to Sears Holdings) was the originator of this entire company, which eventually spun off to do its own thing. Discover has a solid pedigree... of companies that probably won't last much longer. Okay. 

Hmm, I like how Discover owns the Diners Club cards and has used that to get a solid international foothold. I also like how the company has diversified itself into home loans, savings products and other general banking miscellany. I like how Discover is trading pretty cheaply at around 9 times earnings and 2 times book value, which makes it a lot cheaper than buying one of its better known competitors. I also like the 29.9% profit margins the company pulls without having to do anything shady. However, I'm not really a big fan of a company that charges no less than 10.99% interest but only pays 1.5% dividends. If you're not a dividend junkie like me, Discover might be a great company to look into.

SLM Corporation (NASDAQ: SLM), or Sallie Mae as everyone calls it, is the largest originator of federally insured student loans. Even though Sallie Mae is not technically a government entity as of 2004 and the termination of its Congressional charter, it's still got problems. Namely, the only thing that's kept Sallie Mae from being directly and wholly held by Bank of America, JPMorgan Chase and others was that the College Cost Reduction and Access Act of 2007 and the global credit crunch that happened in the ensuing couple of years made it less attractive. So why should you buy something that wasn't good enough for a group of banks that are essentially above accountability for making mistakes?

Honestly, I haven't got any super compelling reasons. While the company is trading for 8.9 times earnings, those earnings may have come from redlining minority students with higher interest rates and overcharging the federal government for its financial responsibilities toward the lender. While Sallie Mae is only trading for 1.7 times its book value, part of this book value has come from attempting to pressure universities to share the private information of students. While there is value here and there is a 3% dividend, I can honestly find a similarly large dividend produced by a less shady company. 

The value in these companies is there, but I guess I'm just too much of a fuddy duddy to accept that profits can be made however the company wants. I like honest business, and of this group Discover is the only company I'd feel good about owning based on its practices.


pongun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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