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Why Is Navient (NAVI) Up 10.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Navient (NAVI - Free Report) . Shares have added about 10.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Navient due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Navient Q1 Earnings Beat Estimates as Provisions Fall

Navient reported first-quarter 2021 core earnings per share of $1.71, which surpassed the Zacks Consensus Estimate of 78 cents. Also, the bottom line is substantially above the year-ago quarter figure of 51 cents.

Core earnings exclude the impacts of certain other one-time items, including mark-to-market gains/losses on derivatives, along with goodwill and acquired intangible asset amortization, and impairment.

Results were supported by a rise in non interest income and provision benefit. However, fall in net interest income (NII) and higher expenses are concerns. Further, private education loans declined during the quarter.

GAAP net income was $370 million or $2.00 per share against the net loss of $106 million or 53 cents per share seen in the prior year.

NII Decreases, Provisions Fall (on Core Earnings Basis)

NII decreased marginally year over year to $295 million.

Non-interest income jumped 60.6% to $281 million. This rise is mainly attributable to higher asset recovery and business processing revenues, and gains on sales of loans.

Provision for loan losses was a benefit of $87 million against the provision of $5 million seen in the prior-year quarter.

Total expenses climbed 3.5% to $265 million. Higher operating expenses and rise in restructuring/other reorganization expenses mainly led to this upswing.

Segment Performance

Federal Education Loans: The segment generated core earnings of $112 million, down 5.9% year over year. Lower revenues were partly offset by a fall in expenses.

As of Mar 31, 2021, the company’s FFELP loans were $56.9 billion, down 2.4% sequentially.

Consumer Lending: The segment reported core earnings of $234 million, which increased significantly from the year-ago quarter’s $54 million. Provision benefits and growth in revenues supported the segment. Net interest margin was 2.99%, shrinking 32 basis points.

Private education loan delinquencies of 30 days or more of $460 million were down 40.2% from the prior-year quarter.

As of Mar 31, 2021, the company’s private education loans totaled $19.7 billion, down 6.3% from the prior quarter. Also, Navient originated $1.7 billion of private education refinance loans during the reported quarter.

Business Processing: The segment reported core earnings of $26 million, up significantly from the $2 million recorded in the year-ago quarter. Higher fee revenues led to this upside.

Source of Funding and Liquidity

In order to meet liquidity needs, Navient expects to utilize various sources, including cash and investment portfolio, issuance of additional unsecured debt, repayment of principal on unencumbered student-loan assets, and distributions from securitization trusts (including servicing fees). It might also issue term asset-backed securities (ABS).

During the reported quarter, Navient issued $2.8 billion in term ABS and $500 million in unsecured debt. Notably, it had $1.5 billion of cash as of Mar 31, 2021.

Capital-Deployment Activities

In the first quarter, the company paid out $29 million in common stock dividends. During the quarter, Navient repurchased 8.2 million shares of common stock for $100 million.

2021 Outlook

Management expects net interest margin in federal education loan segment to be mid-to-high 90’s bps. Also, charge-off rate in the segment is expected to be about 0.1%.

The company projects at least $5.5 billion in new loan originations in 2021.

Net interest margin in the consumer lending segment is expected to be 2.7-2.8%. Also, charge-off rate in the segment is estimated to be 1.5-2%.

In Business Processing segment EBITDA margins in high teens is expected.
EPS (on core earnings basis) is expected to be in the range of $4.15-$4.25. The outlook excludes regulatory and restructuring costs, a favorable interest rate environment and includes a 50% increase in planned full-year share repurchases in 2021 by utilizing the remaining share repurchase authority of $500 million.

Return on equity is likely to be in low 20s. The company targets to achieve an efficiency ratio of approximately 52%. Further, adjusted tangible equity ratio is expected to be 5.5%.  

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 5.37% due to these changes.

VGM Scores

Currently, Navient has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Navient has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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