Navient Corporation (NAVI - Free Report) is scheduled to report second-quarter 2016 results on Tuesday, Jul 19, after the market closes.
The Wilmington, DE-based loan management, servicing and asset recovery company’s first-quarter 2016 core earnings outpaced the Zacks Consensus Estimate by almost 5%. Results were aided by lower provision for credit losses and improved delinquencies in the quarter, partially offset by reduced net interest income and higher expenses.
However, our quantitative model doesn’t call for an earnings beat this time around. Here is why:
A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing chances of an earnings beat. Unfortunately, this is not the case here, as elaborated below.
Zacks ESP: The Earnings ESP for Navient is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 45 cents.
Zacks Rank: Navient’s Zacks Rank #3 increases the predictive power of the ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.
Factors to Influence Q2 Results
Legal and regulatory headwinds persist: The U.S. student loan industry is currently under heightened regulatory scrutiny over alleged anti-consumer practices. Navient, which services over $300 billion in student loans for more than 12 million customers, is under regulatory claims and litigation burden owing to its practices in handling loans. Hence, the quarter might reflect higher related legal reserves.
Expenses may remain stable: Navient’s first quarter’s operating expenses are typically elevated mainly due to taxes and compensation in taxes on composition and compensation pay expenses which occur due to the annual programs in February. However, these expenses are not likely to recur in the second quarter. Further, the company’s several ongoing initiatives to improve efficiency should ease the expense burden. Overall, expenses should remain stable.
Continued new acquisitions of student loan: The student loans market has turned into one of the biggest consumer debt markets of the nation. Though conditions in the financial markets have been challenging lately, Navient’s continued efforts to acquire student loan portfolios, both Federally Guaranteed Student Loans (FFELP) as well as Private Education Loans, should lend some support to quarterly results.
Growth in asset recovery revenues: The company’s efforts to grow asset recovery revenues, with focus beyond student loan platforms, should support revenues at its business services segment. The company is likely to continue benefitting from its previous acquisitions of asset recovery and business process outsourcing firms, including health care payments company, Xtend Healthcare and Gila LLC.
Notably, management is optimistic about the processing business. For instance, the company has won a new multiyear contract in New Jersey as well as new contracts in regions including Arizona, Pennsylvania, California and Mississippi. Also the company expanded its healthcare receivable services to new hospitals in New Hampshire, Pennsylvania, Maryland and Wisconsin.
However, asset recovery revenues continue to be threatened by the Bipartisan Budget Act of 2013. The act, which became effective in Jul 2014, called for lowering the fees payable to guaranty agencies for recovering defaulted FFELP loans.
Navient’s activities during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 45 cents per share over the last seven days.
Stocks That Warrant a Look
Here are some stocks worth considering, as according to our model they have the right combination of elements to post an earnings beat this quarter.
Comerica Incorporated (CMA - Free Report) , which is expected to report on Jul 19, has an Earnings ESP of +1.47% and a Zacks Rank #3.
Federated Investors, Inc. has an Earnings ESP of +2.13% and carries a Zacks Rank #3. It is scheduled to report results on Jul 28.
Cullen/Frost Bankers, Inc. (CFR - Free Report) has an Earnings ESP of +0.96% and carries a Zacks Rank #3. The company is expected to release results on Aug 3.
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