First Marblehead Downgraded At Compass Point

In a report published Tuesday, analysts at Compass Point downgraded The First Marblehead Corporation (NYSE: FMD) from Buy to Neutral. The price target was maintained at $7. The company reported its 3Q15 earnings below expectations, driven by higher expenses and sustained cash burn.

While the company's operating loss and operating expenses for 3Q15 missed the estimates, the revenues were in-line with the expectations. "We project cash to decline by another $12M in 4Q15 due to ongoing operations and $5M for the NC Residuals legal settlement, but increase by $22M from a bank dividend to the parent as a result of its dissolution," the analysts said.

Although First Marblehead continues to have high expenses and the decision on the Massachusetts tax case is still a few months away, the analysts believe that the company could fetch a high price if there is a takeout bid.

According to Compass Point, "Simply put, the pace of operational improvement remains too slow, and cash levels, which remain sufficient today, continue to move lower. We continue to believe management should entertain strategic alternatives but are moving to the sidelines as we have no indication that management is willing to sell at this point."

The FY15 and FY16 operating EPS estimates have been lowered to reflect the company's higher expenses.