Seeking Alpha: Competition And Surplus Capital Seem To Be Holding Marlin Business Services Back

Leasing remains a fundamentally attractive business, but Marlin Business Services (NASDAQ:MRLN) has gone nowhere fast in the year since I last wrote about the company. While 2015 is shaping up as a decent year for leasing activity, more and more commercial banks are turning to leasing as a source of income as low rates crimp lending profits and regulations crimp once-lucrative sources of fee income. This has created some price pressure for this small business leasing operator and that pressure has been magnified by a relatively conservative balance sheet.

I used to value Marlin on the assumption that the company would reach the high end of management's 13% to 15% return on equity target. While higher interest rates would make reaching that level easier (as leasing yields will rise faster than the company's cost of funds), I can't make the argument that 15% is a reasonable target anymore. I do believe that Marlin could be an attractive acquisition for a bank that wants to grow its small business leasing (and/or cross-sell with commercial lending), but I don't see exciting standalone value today.

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Competition And Surplus Capital Seem To Be Holding Marlin Business Services Back

Seeking Alpha: Marlin's Retreat Starting To Get Interesting

The market has apparently started turning its back on small caps, and that is likely to produce some long-term values. I think Marlin Business Services (MRLN) is starting to earn its way onto that list. Marlin is a good play on a small business recovery, and the company's over-capitalized balance sheet and low cost of funds gives management considerable flexibility. I haven't always been so fond of the stocks' valuation, but this 30%-plus pullback from the high is starting to look a little excessive.

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Marlin's Retreat Starting To Get Interesting

Seeking Alpha: Marlin Business Services Offers Good Growth, But Less Value

Equipment leasing can be a lucrative business, as it allows companies that have access to large pools of attractively-priced of capital to earn strong yields from lessees that lack the same level of access to capital or simply don't wish to deploy it that way. In contrast to large leasing enterprises like General Electric's (GE) GE Capital and CIT Group (CIT) or bank leasing operations like those at Bank of America (BAC) and Wells Fargo (WFC), Marlin Business Services (MRLN) is focused on small-ticket and micro-ticket leasing to smaller businesses on a nationwide business.

Although there are few relevant comps to this business, I argue that Marlin is a pretty well-run leasing company. Returns, margins, and credit metrics have rebounded strongly from the 2008/2009 lows, as have the shares. What's more, I believe the company can benefit from the "reinvestment" of profits into an expanded sales force, consistent low-cost funding from its captive bank, and it's quality service offerings to an underserved market. On the other hand, it is difficult to stretch the expected return models enough to generate a truly attractive fair value at these levels.

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Marlin Business Services Offers Good Growth, But Less Value