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We have reaffirmed our long term Outperform recommendation on SLM Corp. (SLM - Analyst Report), commonly known as Sallie Mae, based on its fundamentals in light of the current operating environment.

 Sallie Mae reported second-quarter 2012 core earnings of 49 cents per share, lagging the Zacks Consensus Estimate by a nickel. Results were negatively affected by non-cash loan premium amortization in the quarter. Also, higher funding costs and a decline in federally guaranteed student loan balances were the dampeners.

Yet, lower loan loss provision, reduced operating expenses and higher debt repurchase gains were the positives for the quarter. Sallie Mae has updated its guidance for 2012. For the full year, management now expects to generate core earnings of $2.15 per share, up from $2.00 per share projected previously. Moreover, it anticipates private education loan originations of at least $3.2 billion in 2012.

We believe that Sallie Mae’s leading position in the student lending market, its diversifying efforts, improving credit quality trends and increasing private student loan originations serve as positive catalysts.  

Despite challenges, its cost containment efforts and federal student loan asset acquisition would help the company navigate well through the current cycle. The company’s cost-cutting measures helped achieve year-over-year reduction exceeding 10% in operating expenses in the second quarter of 2012.  Further, the company aims to achieve operating expenses less than $1 billion in 2012.

Moreover, Sallie Mae remains committed to boosting investors’ confidence through dividend increases and share buybacks. In January 2012, the company hiked its quarterly dividend by 25%. Alongside, the company declared a $500 million share buyback program. Moreover, in late May, the company authorized an additional $400 million to be utilized in the company’s ongoing share repurchase program previously announced in January, 2012.

In addition to impressive capital deploying efforts, we believe that the regulatory issues would be manageable on the company’s part.

Sallie Mae is scheduled to report its third quarter 2012 earnings after market release on October 17, 2012. The company is expected to report earnings of 54 cents per share according to the Zacks Consensus Estimate.

Sallie Mae currently retains its Zacks #2 Rank, which translates into a short-term Buy rating. One of its closest peers, Discover Financial Services (DFS - Analyst Report) has a Zacks #1 Rank, implying a short term Strong Buy rating.

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