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Here's Why You Should Hold Sallie Mae (SLM) in Your Portfolio
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An increase in overall college enrollment will drive higher demand for education loans, propelling Sallie Mae’s (SLM - Free Report) loan origination activities. However, given the company’s high debt balance, we believe that SLM carries a higher likelihood of default of interest and debt repayments if the economic situation worsens.
The company is the dominant player in the student loan space. The declining unemployment rate for the more-than-25-year-old college graduate cohort and early enrollment trends indicate the strengthening of longer-term secular growth trends in the private student lending industry. Considering such expectations, Sallie Mae will likely experience modest growth in enrollment for the several upcoming quarters, leading to higher demand for education loans.
Leveraging on the favorable trends, the company is enhancing its Private Education Loan assets and revenues, maintaining a strong capital position and introducing multiple complementary products. Management projects an 8-10% increase in private education loan originations for the current year.
Growth of the loan portfolio will continue to support its net interest income (NII) in the quarters ahead.
Moreover, in first-quarter 2022, Sallie Mae closed the deal with Epic Research LLC to acquire a digital marketing and education solutions company, Nitro College. The acquisition will boost its outreach and brand position, and aid in becoming a holistic education solutions provider for students.
Going forward, such inorganic moves are likely to drive loan originations for the company. As the company is committed to diversifying its revenue streams and meeting customer needs, we believe that such endeavors will support its long-term prospects.
However, Sallie Mae’s sources of funding for its Private Education Loan originations are term and liquid brokered, along with retail deposits raised by the bank. However, such funding poses refinancing risks as the average term of the deposits is shorter than the expected term of the education loans originated by the company.
Also, as of Mar 31, 2022, the company had long-term borrowings worth $5.55 billion, which seem unmanageable relative to a cash position of $3.3 billion. Also, the debt-to-capital ratio of 0.73 is high. The company’s time-interest-earned ratio has declined over the last few quarters to 6.4 as of Mar 31, 2022. As the ratio indicates the company's ability to meet its debt obligations based on its current income, we believe that Sallie Mae carries a higher likelihood of default of interest and debt repayments if the economic situation worsens.
Given an unsound liquidity position and a high debt-equity ratio compared with the broader industry’s average, Sallie Mae’s capital-deployment activities might not be sustainable.
Shares of Sallie Mae have declined 5.9%, which is narrower than the industry’s 9.8% over the past three months.
Some better-ranked stocks in the finance space are Encore Capital Group (ECPG - Free Report) and Enova International (ENVA - Free Report) . ECPG currently sports a Zacks Rank of 1, while ENVA carries a Zacks Rank of 2 (Buy).
ECPG’s Zacks Consensus Estimate for 2022 earnings has been unchanged at $8.18 in the past 30 days. Its shares have gained 3.3% in the past three months.
ENVA’s Zacks Consensus Estimate for 2022 earnings has been unchanged at $6.02 in the past 30 days. Its shares have declined 12.2% in the past three months.
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Here's Why You Should Hold Sallie Mae (SLM) in Your Portfolio
An increase in overall college enrollment will drive higher demand for education loans, propelling Sallie Mae’s (SLM - Free Report) loan origination activities. However, given the company’s high debt balance, we believe that SLM carries a higher likelihood of default of interest and debt repayments if the economic situation worsens.
The company is the dominant player in the student loan space. The declining unemployment rate for the more-than-25-year-old college graduate cohort and early enrollment trends indicate the strengthening of longer-term secular growth trends in the private student lending industry. Considering such expectations, Sallie Mae will likely experience modest growth in enrollment for the several upcoming quarters, leading to higher demand for education loans.
Leveraging on the favorable trends, the company is enhancing its Private Education Loan assets and revenues, maintaining a strong capital position and introducing multiple complementary products. Management projects an 8-10% increase in private education loan originations for the current year.
Growth of the loan portfolio will continue to support its net interest income (NII) in the quarters ahead.
Moreover, in first-quarter 2022, Sallie Mae closed the deal with Epic Research LLC to acquire a digital marketing and education solutions company, Nitro College. The acquisition will boost its outreach and brand position, and aid in becoming a holistic education solutions provider for students.
Going forward, such inorganic moves are likely to drive loan originations for the company. As the company is committed to diversifying its revenue streams and meeting customer needs, we believe that such endeavors will support its long-term prospects.
However, Sallie Mae’s sources of funding for its Private Education Loan originations are term and liquid brokered, along with retail deposits raised by the bank. However, such funding poses refinancing risks as the average term of the deposits is shorter than the expected term of the education loans originated by the company.
Also, as of Mar 31, 2022, the company had long-term borrowings worth $5.55 billion, which seem unmanageable relative to a cash position of $3.3 billion. Also, the debt-to-capital ratio of 0.73 is high. The company’s time-interest-earned ratio has declined over the last few quarters to 6.4 as of Mar 31, 2022. As the ratio indicates the company's ability to meet its debt obligations based on its current income, we believe that Sallie Mae carries a higher likelihood of default of interest and debt repayments if the economic situation worsens.
Given an unsound liquidity position and a high debt-equity ratio compared with the broader industry’s average, Sallie Mae’s capital-deployment activities might not be sustainable.
Shares of Sallie Mae have declined 5.9%, which is narrower than the industry’s 9.8% over the past three months.
Image Source: Zacks Investment Research
SLM carries a Zacks Rank of 3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
Some better-ranked stocks in the finance space are Encore Capital Group (ECPG - Free Report) and Enova International (ENVA - Free Report) . ECPG currently sports a Zacks Rank of 1, while ENVA carries a Zacks Rank of 2 (Buy).
ECPG’s Zacks Consensus Estimate for 2022 earnings has been unchanged at $8.18 in the past 30 days. Its shares have gained 3.3% in the past three months.
ENVA’s Zacks Consensus Estimate for 2022 earnings has been unchanged at $6.02 in the past 30 days. Its shares have declined 12.2% in the past three months.