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Analyst Blog

On Sep 30, 2013, we reiterated our Neutral recommendation on SLM Corporation (SLM - Analyst Report). The decision was based on the proposed split of the company, which will expectedly help Sallie Mae to navigate through the tough regulatory environment. However, a decrease in net interest income and higher operating expenses were the downsides.

Why Neutral?

To boost the company’s long-term growth in the present economic environment, Sallie Mae announced the decision to split the company’s present business into 2 parts, namely an education loan management business and a consumer banking business.

We expect the company to benefit from this, as with the division, management’s focus will be on Sallie Mae’s growing consumer banking business and on tackling its education loan portfolios. Taken together, these are expected to drive bottom-line growth in the near term.

Moreover, the company’s business shift toward private student loans and direct channel loans as well as cost reduction measures – to counter the legislative impact – are positives for the stock. Extensive capital deployment activities also continue to reinforce investors’ confidence in the stock.

Sallie Mae’s second-quarter earnings of $1.02 per share substantially beat the Zacks Consensus Estimate and came above the prior-year quarter figure as well. Over the last 60 days, the Zacks Consensus Estimate for 2013 increased 1% to $2.84, whereas for 2014, it remained stable at $2.51. As a result, Sallie Mae currently carries a Zacks Rank #3 (Hold).

However, the scope and profitability of Sallie Mae’s businesses are exposed to risks arising from legislative and administrative actions. Further, we remain concerned about the run-off of the company’s FFELP loan portfolio, which will weigh further on interest income. In addition, the deteriorating credit quality is a negative for the stock.

Other Stocks Worth Considering

Other financial institutions that are performing better than Sallie Mae include Encore Capital Group, Inc. (ECPG - Snapshot Report), Discover Financial Services (DFS - Analyst Report) and World Acceptance Corp. (WRLD - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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